Performance Bonds

What Is a Performance Bond?

A performance bond is a guarantee—usually issued by a bank or insurance company (called a surety)—that ensures the contractor will fulfill their contractual obligations.

If the contractor defaults (e.g. walks off the job, goes bankrupt, or performs substandard work), the surety steps in to either:

  • Pay to have the project completed by another contractor, or

  • Compensate the project owner for losses (up to the bond amount).

Who Are the Parties Involved?

  1. Principal – The contractor who purchases the bond.

  2. Obligee – The project owner requiring the bond.

  3. Surety – The insurer or bank that guarantees the contractor’s performance.

Key Benefits

  • For Project Owners: Provides financial protection and project completion assurance.

  • For Contractors: Demonstrates credibility and financial stability.

  • For Sureties: They will seek to recover costs from the contractor if they pay out a claim.

What a Claim Might Look Like

  1. Contract Awarded:

    • The contractor wins a job and the contract requires a performance bond.

  2. Bond Issued:

    • The contractor arranges the bond through a surety, who evaluates their financial stability and track record.

  3. Project Begins:

    • If the contractor performs the work as agreed, the bond expires at project completion.

  4. If Contractor Defaults:

    • The project owner files a claim with the surety.

    • The surety investigates and either:

      • Pays to complete the job, or

      • Pays damages (up to the bond amount).

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