Banks and many major corporate organizations issue performance bonds to their clients to serve as an assurance and agreement that the contracts would be completed satisfactorily and on-time; else they would be compensated monetarily.

Features

The main underlying feature of a performance bond is that all terms and conditions must be clearly spelled out by both the client and the contractor. In other words, both the interested parties must clearly and explicitly understand what they are getting into. The parties must define the work to be completed, the costs to be incurred and the time to be taken to complete it.

Function

These bonds are generally and extensively issued in the real estate and construction industries. These bonds underline that the contractor is obligated to the client for the work entrusted or else will reimburse the client monetarily for all the damages. The client can demand legally from the contractor expenses and damages up to the entire amount of the contract.

Benefits

The clients get insurance coverage by these bonds. As only well established contractors are allowed to sign performance bonds, the risks to the clients are significantly reduced.

Disadvantages

Qualified contractors quote high prices and the costs to the clients are substantial and significant. Also, upcoming and small contractors lose out on work.

Conclusion

Performance bonds are tools designed to safeguard the clients' interests. Also these bonds see that the contractors maintain quality and timeliness in their work.

Source:

Storm Water Center: Performance Bonds

Business Dictionary: Performance Bonds