Performance Bonds
Candlefocus EditorEssentially, the performance bond guarantees that a seller, contractor, or supplier will meet their obligations stated in the contract. When granted, the performance bond remains in effect until all of the obligations have been satisfied or until the contract ends. It is not required to have a performance bond in place unless it is stipulated in the contract.
Performance bonds are commonly used in construction and home improvement projects. In this type of project, the performance bond is typically purchased by the contractor and issued to the homeowner—the other party to the contract—as a guarantee that the contractor will complete the agreed upon works. This means that if the contractor fails to finish the agreed upon works, then the homeowner can submit a claim on the bond and receive the costs of the contract plus any damages resulting from the contractor’s failure.
Performance bonds are also often used in business-to-business transactions where one company is contracting another to produce or provide a product or service. In these scenarios, the buyer usually requires the seller to purchase a performance bond as a guarantee that the seller will fulfill the terms of the contract.
In summary, a performance bond is an insurance product that provides reassurance to one party of a contract that the other party will fulfil the specified obligations. It guarantees payment in the event of a breach of contract, and will cover both the cost of the contract and any damages that occur as a consequence of the breach. Performance bonds are most commonly used in construction and home improvement projects and in business-to-business transactions.