Performance Bond Definition

A performance bond, which is given by a bank or insurance company as surety or bondsman, is not so much a guarantee of the contractor's performance but is rather an agreement to meet the employer’s additional costs, up to an agreed maximum, if the contractor fails to perform (usually owing to insolvency). The agreed maximum is usually 10% of the contract sum.

When a contractor becomes insolvent before completing the works, the employer does not of course have to continue paying him. However, this saving is likely to be exceeded by the cost of paying a second contractor to complete the works, plus other direct losses, and the agreed maximum is a rough and ready pre-estimate of that extra cost and those losses.

A bond normally expires at practical completion or when defects appearing during the defects liability period have been made good.