Performance bond
Encyclopedia
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
.
A job requiring a payment & 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.
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.
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.
Performance bonds have been around since 2,750 BC and the Romans developed laws of surety around 150 AD, the principles of which still exist.
Surety bond
A surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract...
issued by an insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
company or a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
to guarantee satisfactory completion of a project by a contractor
Independent contractor
An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when...
.
A job requiring a payment & 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
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
(most often due to the bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
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.
The term is also used to denote a collateral deposit of "good faith money"
Earnest payment
An earnest payment is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious about wanting to complete the purchase...
, intended to secure a futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
, commonly known as margin
Margin (finance)
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
.
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.
Under the Miller Act
Miller Act
The Miller Act requires prime contractors on some government construction contracts to post bonds guarantying both the performance of their contractual duties and the payment of their subcontractors and material suppliers.-Background and Purpose:The Miller Act addresses two concerns that would...
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
Little Miller Act
A "Little Miller Act" is a state statute, based upon the federal Miller Act, that requires prime contractors on state construction projects to post bonds guarantying the performance of their contractual duties and/or the payment of their subcontractors and material suppliers.-Typical statutory...
” statutes requiring Performance and Payment bonds on State Funded projects as well.
Performance bonds have been around since 2,750 BC and the Romans developed laws of surety around 150 AD, the principles of which still exist.
See also
- completion guaranteeCompletion guaranteeA completion guarantee is a form of insurance offered by a completion guarantor company that is often used in independently financed films to guarantee that the producer will complete and deliver the film to the distributor thereby...
- General contractorGeneral contractorA general contractor is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and communication of information to involved parties throughout the course of a building project.-Description:...
- Independent contractorIndependent contractorAn independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when...
- Shop drawingShop drawingA is a drawing or set of drawings produced by the contractor, supplier, manufacturer, subcontractor, or fabricator. Shop drawings are typically required for pre-fabricated components. Examples of these include: elevators, structural steel, trusses, pre-cast, windows, appliances, cabinets, air...
- SubcontractorSubcontractorA subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract....
- Submittals (construction)Submittals (construction)Submittals in Construction Management are shop drawings, material data, samples, and product data. Submittals are required primarily for the architect and engineer to verify that the correct products will be installed on the project....
- Surety bondSurety bondA surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract...
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.