A performance bond is a guarantee intended to compensate an obligee if a contractor fails to perform covered contractual obligations. It is commonly issued by a surety or bank in favor of the buyer, project owner or other beneficiary.
Who are the parties?
- Principal: the contractor or supplier whose performance is guaranteed
- Obligee: the beneficiary receiving the protection
- Surety or issuer: the party providing the bond or guarantee
How is the bond amount determined?
The required amount is often stated as a percentage of contract value. For a $2,000,000 contract with a 10% requirement, the bond amount is $200,000. If the illustrative annual premium is 1.5% of the bond amount, the first-year premium is $3,000.
Illustrative performance-bond calculation
| Calculation step | Amount | Method |
|---|---|---|
| Contract value | $2,000,000 | Approved contract amount |
| Required bond | $200,000 | $2,000,000 × 10% |
| Illustrative annual premium | $3,000 | $200,000 × 1.5% |
Actual pricing and liability depend on the instrument, issuer, duration, credit assessment and jurisdiction.
Performance bond vs. advance payment guarantee
A performance bond addresses covered non-performance. An advance payment guarantee protects repayment of an advance under its terms. A contract may require both instruments.
What should the beneficiary review?
Check the guaranteed obligations, amount, expiry, claim conditions, governing rules, issuer acceptability and reduction provisions. An on-demand guarantee and a conditional surety bond can respond differently.
