If you are like most people who are making a living only from being gainfully employed, you do not need to a performance bond. This is because a performance bond is NOT an instrument that you can buy and enjoy interest payments from. Also known as surety bond, it ensures that a party to a contract is protected just in case the other party is unable to deliver according to the terms of the contract.
Surety bonds are mostly used in the construction industry as well as in public works. All projects being put forth by the federal and state government projects worth over $100,000 are required to be protected by a surety bond. The surety bond requirement came as a result of the enforcement of the Miller Act. The private industry or private construction projects are actually not required to be protected by a surety bond, however, it has become the standard because it makes sense. But how does it work?
It works this way: A contractor gets a bond from a third-party provider. The amount he pays depends on the value of the project and the risks involved in its completion, although there are providers that also consider the credit score of the contractor. Once the bond is in place, the contractor can then complete his bid. Ideally, the project should be completed in accordance with the terms of the contract, however, if it does not happen, the bond provider will pay out to the project owner. More details are found on the Bili Simpolisi Law Blog if you want to delve a little deeper.
Performance bonds do not exist alone. They are always paired by payment bond, which guarantees payment to the contractor and all the workers in the project.
Where can you get performance bonds and payments bonds? There are third-party companies that provide them. To find them, just do a quick search on Google.
There are many types of performance bonds out there and they reflect the nuances of the construction industry and that of public works. You do not need to know all of them especially if you have no business bidding on projects, however, if you are entering the construction industry or are planning on bidding on a government project, you should familiarize yourself with the options available to you.
A performance bond is really a lot like term insurance. You pay for it once and when the term is up, the money is gone. The money is NOT repaid to you even if you completed a project properly.
In any case, it would surprise you to know that performance bonds are not only used in construction and public works projects, they are also used in other industries like commodities trading, among others. In commodities trading, the buyer and seller enter a contract for the latter to deliver goods at a certain price. A guarantee bond or surety bond ensuresthat the buyer is protected from financial loss in case the seller is not able to meet the terms of the contract for sale.