What is a Performance Bond?

A performance bond is a surety bond issued by an insurance company to guarantee satisfactory completion or performance of a project by a contractor. These are generally three party agreements as outlined below:

• Principal - Contractor being hired to perform under a certain contractual agreement
• Obligee - Party for whom the bond will benefit in the event of a contractual default. 
• Surety - Guarantor, generally an insurance company.

For example, a General Contractor “Principal” may be required to provide a performance bond in favor of a project Owner “Obligee” in order to secure a certain contract. If the Principal fails to perform his or her duties under the contract specifications, the Obligee may call upon the Surety to cure the problem or make payment(s) out of the bond. These payments are for damages up to the limit of the performance bond.

In the same way a Sub-Contractor may be required to provide a performance bond in favor of a General Contractor “Obligee” in order to secure a certain subcontract. If the Principal fails to perform his or her duties under the subcontract specifications, the Obligee may call upon the Surety to cure the problem or make payment(s) out of the bond. These payments are for damages up to the limit of the performance bond. When subcontractors provide performance bonds to general contractors it is also called “bonding back”.

As with any surety bond, if there is a default which results in loss by the surety company, the surety will expect the principal to repay any monies paid out by the surety in the event of a claim. BONDS ARE NOT INSURANCE!

Contact one of our contract experts today for a free consultation. Our expert contract bond department is experienced in the inner workings of and requirements of performance bonds in all arenas. We can usually give clients a good idea of what will be required as well as costs associated with performance bonds. During this process we can even provide a quick lesson on how performance bonds work. Our customers return each time a performance bond is required because of the service and knowledge our staff is able to offer performance bonds.