Performance bond

(engineering) A bond that guarantees performance of a contract.

A bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract.

Investopedia Says:
For example, a contractor may issue a bond to a client for whom a building is being constructed. If the contractor fails to construct the building according to the specifications laid out by the contract, the client is guaranteed compensation for any monetary loss.

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1. Bond that calls for specific monetary payment to a beneficiary if the purchaser or maker fails to do something or acts in violation of a contract. It may be a Surety Bond purchased from an insurance company, or cash held in an Escrow account by a bank or a third party.

2. Standby Letter of Credit issued by a bank that guarantees the issuing bank will pay a third party Beneficiary in the event the bank's customer fails to meet a contractual obligation.

One issued by an insurance company; posted by a party who is to perform certain work. If the work is not performed, the insurer promises to complete the work or pay damages up to the amount of the bond. Contrast with Completion Bond.
Example: The contract requires the Contractor to put up a $100,000 performance bond. If the contractor fails to do the job, the property owner has assurances of compensatory payment from the insurance company.

A bond of the contractor in which a surety guarantees to the owner that the work will be performed in accordance with the contract documents; frequently combined with the labor and material payment bond; except where prohibited by statute.

A "bond which guarantees against breach of contract." 440 P. 2d 600, 605. Generally used in building contracts to guarantee that a contractor will perform the contract. In the event the contractor defaults or otherwise breaches the contract, the owner of the building project may use the proceeds of the bond to complete the project. 423 N.E. 2d 390, 393. Depending upon its terms, the proceeds of a performance bond may also be used to pay subcontractors who furnish labor and materials. 187 A. 2d 799, 802. See also bond [performance bond].

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

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^[1], 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.

The term is also used to denote a collateral deposit of "good faith money"^[2], intended to secure a futures contract, commonly known as margin^[3].

Performance bonds are generally issued as part of a 'Performance and Payment Bond'^[4], where a Payment Bond guarantees that the contractor will pay the labour and material costs they are obliged to.

Performance bonds have been around since 2,750 BC and, more recently, the Romans developed laws of surety around 150 AD^[5], the principles of which still exist.

See also

• completion guarantee
• General contractor
• Independent contractor
• Shop drawing
• Subcontractor
• Submittals (construction)
• Surety bond

References

1. ^ "Performance bonds". Coface UK. http://www.cofaceuk.com/CofacePortal/UK/en_EN/pages/home/what-we-do/protection/surety/performance-bonds. Retrieved 2009-02-23. 
2. ^ Good Faith Money, http://investopedia.com/terms/g/goodfaithmoney.asp, retrieved December 04, 2006 
3. ^ Margins, http://www.oxfordfutures.com/futures-education/margins.htm, retrieved 17 September 2009 
4. ^ "Payment Bond". Bryant Surety. http://www.bryantsuretybonds.com/Surety_Bonds/Contract_Bonds/Payment_Bond.html. Retrieved 2009-02-23. 
5. ^ Russell, Jeffrey Burton (2000). Surety bonds for construction contracts. Reston, Va.: ASCE Press. pp. 9. ISBN 0-7844-0426-7. 

External links

• Surety Information Office - An association dedicated to suretyship in the United States
• National Association of Surety Bond Producers - NASBP is the association of and resource for surety bond producers.

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