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Insurance & Bonding

Performance Bond

In Plain English

A guarantee that a contractor will finish the job as promised.

Definition

A performance bond is a surety bond that guarantees a contractor will complete a project according to the contract terms and specifications. If the contractor defaults, the surety may complete the project itself, hire a replacement contractor, or pay the owner the financial damages up to the bond's penal sum. Performance bonds are standard on public projects and increasingly common on large private projects, typically sized at 100% of the contract value.

Why It Matters in Bidding

Performance bonds shape who can even compete for a project, because a contractor's bonding capacity, set by its surety based on financial strength and track record, caps the contract value it can bid. The cost of the bond, typically a small percentage of contract value, must be carried as a line item in the estimate, and on public work a performance bond is usually mandatory, making surety prequalification part of the procurement gate.

Example

A municipality required a performance bond for the full contract amount on a $3 million road resurfacing contract, and when the contractor abandoned the work the surety stepped in and paid to have a replacement contractor complete the project.

Related Terms

Bid BondPayment BondSurety Bond

Frequently Asked Questions

Performance bond premiums are typically a small percentage of the contract value, often in the low single digits, with the rate depending on the contractor's financial strength, experience, and the project size. Estimators carry this premium as a direct cost in the bid. Stronger contractors qualify for lower rates, so bonding cost can be a competitive factor on bonded work.
A performance bond guarantees the contractor completes the work per the contract, protecting the owner. A payment bond guarantees that subcontractors and suppliers get paid, protecting them and the owner from liens. On public projects both are commonly required together, frequently each for the full contract value, so estimators should confirm whether one or both apply.
If the contractor defaults, the owner notifies the surety, which investigates and then chooses among completing the work itself, financing the original contractor, hiring a replacement, or paying the owner damages up to the bond's penal sum. The penal sum, usually the full contract value, is the surety's maximum exposure, not an automatic payout amount.

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