What is a performance bond?

A performance bond serves as a financial guarantee that the contractor will complete the project according to the specified terms in the contract. It provides assurance to the project owner that if the contractor fails to fulfill their obligations—due to default, inability to perform, or other reasons—the surety company backing the bond will step in to either ensure project completion or compensate the owner for any financial losses incurred. This is crucial in the construction industry, where large projects often involve significant investments, and owners need to mitigate the risk associated with contractor performance.

In contrast, a warranty for the project's durability focuses on the quality and longevity of the work performed, rather than the guarantee of completion. A bond protecting the owner from a subcontractor's failure typically addresses specific roles within a larger project rather than the overall responsibility of the main contractor. Similarly, a fee charged by the contractor for service delays does not relate to performance bonds at all; instead, it pertains to financial penalties arising from delays in project execution. Thus, the essence of a performance bond lies primarily in ensuring project completion as agreed upon in the contract.