What is "performance bond"

n. (context legal English) A contractor's bond, guaranteeing that the contractor will perform the contract and providing that, in the event of default, the surety may complete the contract or pay damages up to the bond limit.

n. a bond given to protect the recipient against loss in case the terms of a contract are not filled; a surety company assumes liability for nonperformance [syn: surety bond]

A performance bond , also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.

A job requiring a payment and performance bond will usually require a bid bond, to bid the job. When the job is awarded to the winning bid, a payment and performance bond will then be required as a security to the job completion.

For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.

Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects. Another example of this use is in commodity contracts where the seller is asked to provide a Bond to reassure the buyer that if the commodity being sold is not in fact delivered (for whatever reason) the buyer will at least receive compensation for his lost costs.

The term is also used to denote a collateral deposit of "good faith money", intended to secure a futures contract, commonly known as margin.

Performance bonds are generally issued as part of a 'Performance and Payment Bond', where a Payment Bond guarantees that the contractor will pay the labour and material costs they are obliged to.

In the United States, under the Miller Act of 1932, all Construction Contracts issued by the Federal Government must be backed by Performance and Payment Bonds. States have enacted what is referred to as “ Little Miller Act” statutes requiring Performance and Payment bonds on State Funded projects as well.