Meaning of a performance bond

Written by brian gawley
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Meaning of a performance bond
Performance bonds, though not insurance policies, ensures the completion of a project. (construction 1 image by maloni from Fotolia.com)

A performance bond guarantees a contractor will complete the project, including payment of labour and materials to subcontractors. If the project isn't finished or is finished over budget or behind schedule, the bond fund completions or otherwise compensates the owner. It is submitted by the winning bidder after the contract award.

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Function

A performance bond usually is issued by a bank or insurance company, but is not an insurance policy. If project owner pursues the bond proceeds, the bank or insurance company gets the money back from the contractor. Thus, it also is known as a "standby letter of credit."

Features

A performance bond can cost an average of 1 per cent to 5 per cent of the project cost. Factors influencing a performance bond's cost include the contract amount, type of construction, construction time frame, the owner's credit or financial standing, national laws, contractor's track record, contractor's ongoing projects and agent or broker fees.

Types of bonds

Performance bonds usually give the bond holder three choices: Hiring another contractor to complete the project; selecting a new contractor that deals directly with the owner; or letting the owner complete the project and charge the bond holder, who then can go after the defaulting contractor.

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