what is a performance bond 
a performance bond is a financial guarantee to one party in a contract against the failure of the other party to meet its obligations it is also referred to as a contract bond a performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects investopedia laura porterunderstanding performance bondsa performance bond is a financial guarantee that the terms of a contract will be honored if one party to a contract cannot complete their obligations the bond is paid out to the other party to compensate for their damages or costs the miller act requires contractors on all federal public works contracts with a value of 100 000 or more to get a performance bond guaranteeing their work 1jobs that require payment and performance bonds go through job or project bidding first as soon as the job or project is awarded to the winning bidder payment and performance bonds are provided as a guarantee for the completion of the project performance bonds are common in construction and real estate development in such situations an owner or investor may require the developer to assure that contractors or project managers procure performance bonds in order to guarantee that the value of the work will not be lost in the case of an unforeseen negative event a performance bond is an agreement between three parties as explained below performance bonds are also used in commodity contracts performance bonds are provided to protect parties from concerns such as contractors being insolvent before finishing the contract when this happens the compensation provided for the party that issued the performance bond may be able to overcome financial difficulties and other damages caused by the insolvency of the contractor a payment bond and a performance bond work hand in hand a payment bond guarantees a party pays all entities such as subcontractors suppliers and laborers involved in a particular project when the project is completed a performance bond ensures the completion of a project setting these two together provides the proper incentives for laborers to provide a quality finish for the client performance bonds are also used in commodity contracts where a seller is asked to provide a bond to reassure the buyer that if the commodity being sold is not in fact delivered the buyer will at least receive compensation for lost costs advantages and disadvantages of a performance bondthe issuance of a performance bond protects a party from monetary losses due to failed or incomplete projects for example a client issues a contractor a performance bond if the contractor is not able to follow the agreed specifications in constructing the building the client is given monetary compensation for the losses and damages the contractor may have caused performance bonds protect the contracting party in the event that their contractor may become insolvent or otherwise unable to meet the terms of a contract if the costs of completing the project overrun their projections the obligee will not be responsible for the additional expenses this reduces the risk for developers or other companies when they engage in large scale construction projects however there are some risks to consider the surety may attempt to argue that the obligee did not comply with all the requirements of the bond in order to deny payment or they may try to get the obligee to settle on a lesser amount moreover it is up to the obligee to calculate the financial cost of a failure by the contractor if the obligee underestimates the cost of non performance they will have to absorb those extra costs on their own protects an obligee from additional costs if work is not completed reduces the risk for developers in construction and other large projects bond issuers may attempt to deny payment if the obligee underestimates the cost of non performance they will have to absorb these extra costs on their own performance bonds add an additional cost to the contractor that may be passed on to the obligee 