Performance Bonds

Written by Michael O'Brien
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Performance bonds are one way a surety company guarantees the work of a contractor. When someone makes certain promises, those obligations must be met. This is especially true when large sums of money, resources, and time are involved. The construction industry is one of the biggest benefactors of bonding.

Understanding Performance Bonds

As the name implies, performance bonds are a means of guaranteeing the performance of a company to live up to what it is promising to do. This also applies to any subcontractors or material suppliers that company may employ. All parties must adhere to certain cost, time, and quality criteria based on what they've been contracted to produce.

A surety company distributes bonds as a kind of credit extension. This shifts the financial responsibility from the person paying to have certain work done to the surety company. In the event something should go wrong, the surety company pays for it. It's sort of like an insurance policy in reverse. Instead of paying for the eventuality that something may go wrong, a surety company banks on the expectation that nothing will go wrong.

Low Risk Ventures

Because the failure of a contractor to live up to their obligations is so potentially damaging to a surety company, such companies only bond those contractors who are the most reliable. They would not submit performance bonds to those unable to perform promised services. This process acts as a very effective guarantee.

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