Performance bond

A performance bond is a guarantee/surety usually provided by a bank or insurance company submitted to the principle client or customer by a contractor on winning a bid. This is to ensure payment of a sum (not exceeding the maximum of the defined sum) to ensure that the funding to complete the contract to the specified level of completion is in place. This bond provides the client with the guarantee that the contractor will complete the contract or failing that the bond will fund a new contractor to complete the works to the agreed level defined in the initial contract. The bond is not usually drawn down in total but will provide the balance of funds required to complete the contracted works. This payment will take into account the value of works already complete satisfactorily and therefore assumes that a part draw-down will complete the works. The sum due from the bond will not exceed the specified sum of that guarantee. Unlike a fidelity bond, a performance bond is not an insurance policy and (if cashed by the principal) the payment amount is recovered by the guarantor from the contractor. However, the surety provider company is not obligated to pay more than limit of liability stated in the bond even in the case of penalty or penal awards. Performance bonds are sometimes also called standby letter of credit, contract performance bond or The Performance Bond’s legal definition maybe paraphrased thus; ‘A contract wherein a third-party, in exchange for a fee, secures another’s fulfilment of a contract or performance of a duty’. Though the contents and aim of these guarantees is common there are few set layouts though many governmental and state bodies present a standardised format to cover their own specific requirements. Care should be taken when accepting a security bond that it is issued to cover the country for the performance of the relevant contract and is written under the law of that jurisdiction. Within Europe care should be exercised to comply with EU legislation in terms of non-discriminatory inter-country requirements and conditions.