What is a performance bond?

It is an insurance policy covering the risk that someone might fail to perform as promised. Performance bonds or surety bonds are most typically utilized in construction projects, where the ramifications of a party’s failure to perform can be fatal to completion of a project (especially if the project involves multiple providers or goods and/or services). Here’s a not uncommon scenario: you hire a contractor to build a new warehouse for your business. The contractor hires a subcontractor to excavate the foundation for the building, but fails to pay him. The subcontractor demands payment from you (the project owner), since the contractor has ignored the subcontractor’s request for payment. If you were smart enough to require that the contractor maintain (and pay for) a performance bond, you can make a claim against that bond for money to pay the subcontractor.

It is important that, once you require your contractor to obtain a performance bond, you verify that it is valid and has been paid for by the contractor. The fact that the contractor gives you a piece of paper saying the bond is in place is not a substitute for you verifying the fact with the insurance company that issues the bond.  Yes, you may contact the insurance company directly to verify the validity of the bond. If possible, get a copy of the actual insurance policy and read it — since the “Devil is in the Details,” as we lawyers say.

In summary, performance bonds are an excellent means to protect the owner from a contractor’s failure to perform. Just make sure you verify that it is “real” and that it does what you need it to do.