There are so many types of surety bonds out there that it can be hard to differentiate between them. Performance bonds are some of the most common bonds out there, but like all bonds, they can be confusing. So we set out to create a handy guide to tell you what a performance bond is and when you might need one.
What Exactly Are Performance Bonds?
The idea behind a performance bond is that one party wants to ensure that another party performs its duties as laid out in a contract. Say you own a piece of land and you want to build a house on it. You would hire a construction company and draw up a contract with them. Then, you’ll begin paying that company to complete their work. But what happens if the construction company then doesn’t honor the terms of the contract? Are you just left hanging out to dry?
Not with a performance bond! These bonds are monetary guarantees that you (the obligee in this scenario) will receive compensation if the construction company (the principal) doesn’t do their work properly. These two parties obtain a bond from a surety (that’s us!) that will pay out in the case that the principal fails to perform their duties properly. Therefore, performance bonds are effectively insurance against failures to produce what the obligee pays for.
When Do I Need to Get a Performance Bond?
These types of bonds are major parts of the construction and real estate industries. Property owners will usually require these bonds in order to protect their investments in their properties. This way, if a construction company becomes insolvent or performs poor-quality work, the developer will receive some financial compensation.
Performance bonds may also be part of a commodity exchange. If one party wants to buy something expensive or unique from another, they may ask for a performance bond in case the seller can’t provide what they say they can. From there, it works just like a construction bond: if the seller fails to hold up their end of the bargain, the buyer gets compensated.
While it may seem like a burden, getting a performance bond isn’t just a good idea for the obligee; it’s a good idea for all parties. They protect everybody involved from financial and reputational damages. If you’re still not sure if you need a performance bond, then don’t hesitate to give us a call!