Legal Definitions - performance bond

A performance bond is a type of bond that ensures the timely completion of a contract. It is usually given by a surety, such as a bank or an insurance company, to guarantee that the work will be done according to the terms of the agreement. The face amount of the bond is typically 2% of the value of performance, but it can be as much as 5%.

For example, if a construction company is hired to build a new office building, the owner of the building may require the construction company to provide a performance bond. This bond would ensure that the construction company completes the project on time and according to the specifications outlined in the contract. If the construction company fails to do so, the surety would be responsible for covering the costs of completing the project.

There are different types of performance bonds, including:

• Nonoperative performance bond: This type of bond is not currently in effect but is activated upon the issuance of the buyer's letter of credit or other approved financing.
• Operative performance bond: This type of bond has been activated by the issuance of the buyer's letter of credit or other approved financing.
• Revolving performance bond: This type of bond is in continuous effect for the duration of the contract, usually plus an additional number of days (often 45).
• Up-front performance bond: This type of bond is given before the issuance of the buyer's letter of credit or other financing.

Overall, a performance bond is an important tool for ensuring that contracts are completed on time and according to the agreed-upon terms. It provides peace of mind for both parties involved in the contract and helps to mitigate the risks associated with large-scale projects.