Differentiating Surety Bonds and Performance Bonds

performance bond - What is the definition of a surety bond - minimalist interior design

What is the definition of a surety bond?

A surety bond is a three-party agreement between the principal, the obligee, and the surety. The purpose of a surety bond is to bind them in ensuring that both parties will abide by all terms and conditions set forth in the contract or agreement.

A bond, also known as “recognizance”, is defined as an amount of money deposited or guaranteed by one who appears before a court for some legal purpose. For example, if you are required to attend court for any reason there may be certain conditions required of you – that you appear in court on time, that you wear an ankle monitor for monitoring your whereabouts while in the community, etc. If these conditions are not met then usually there can be penalties enforced including revocation of your freedom.

What is the definition of a performance bond?

A performance bond is a guarantee from a surety company that the terms of an agreement between it and its customer will be fulfilled. It can also be called contract performance or payment bond, construction bond, public works bond, license and permit bond, bid security, or contract bond.

In this context ‘contract’ refers to a legal agreement between two parties. The most common type of performance bond is a construction/prime contractor performance bond which guarantees that a general contractor will properly construct a project in accordance with plans and specifications. 

A subcontractor’s/supplier’s bidding on work by the prime contractor must usually submit their own bidder’s performance and payment bonds as well since they are entering into contracts with the general contractor who has entered into contracts with the owner. The owner of the project may also require its own performance bond guaranteeing that it will make payments to the contractor.

What distinguishes a surety bond from a performance bond?

Performance bonds are used to ensure that a contractor will be able to complete the contracted work for an employer. A surety bond is a promise by one party (the guarantor or “surety”) to assume financial responsibility for another party’s debt or performance if necessary. 

The obligation of the surety may be secured in some manner, but it is not always required. The term “bond” alone usually means that the obligation is secured by a pledge of collateral such as real estate or securities.

A performance bond ensures that a contractor will be able to complete the contracted work for an employer and requires the bonding company (not necessarily the contracting company) to pay any damages which might occur if there were a failure of the contractor to complete the project. 

A performance bond may be considered to be a guarantee that the work will be done in accordance with plans and specifications, but it should always be understood that there are many factors other than a construction that determine whether actual costs are less or exceed estimated costs.

What is a surety bond and how does it work?

A surety bond is a three-party agreement between the principal (or obligor), usually a person or company, the surety company that issues the bond, and the obligee who receives the benefit of the bond required by law. An example of this type of agreement would be if you are starting a new business. 

The government requires you to provide proof that your company has purchased an appropriate amount of liability insurance in case your customers are injured on your property. Rather than holding cash in case someone files suit against you, however, you have agreed to pay any losses out of pocket until you have satisfied your debt. 

You begin paying premiums for this coverage as soon as your policy begins. Therefore, should something happen within that time period, there is a source of reimbursement from your insurance company that can pay for any customer’s medical bills.

What is a performance bond and how does it work?

A performance bond (or contract bonds) is a guarantee issued by an insurance carrier that the principal (contractor or vendor) will perform their contractual obligations as outlined within the terms of the agreement if for any reason they are unable to do so. 

The company issuing the bond must be authorized to do business in all states where work under the contract occurs if those states require licensure or registration for this type of guaranty. Typically, not every state requires licensure, but it is important to check with the states where contractors will be working.

A performance bond typically covers work for both labor and materials under the terms of the contract agreement, including any subcontractors if applicable. This ensures that if anything happens to prevent the completion of the project, you are protected financially from not receiving the product or service promised within the time frame specified in your agreement. 

For example, say an invoice goes unpaid by a customer or another company steps in and takes over that portion of the work after having made an agreement with your contractor/vendor. The bond will reimburse you for this loss as outlined within your contract document. It may also protect you financially against any other unforeseen eventualities.

Visit us to know more about performance bonds!

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.