Everything You Should Know About Performance Bonds

If you’re in business, you might have heard the term “performance bond.” But what is it, and what does it mean for your business? This article will cover everything you need to know about performance bonds. 

Performance Bonds 

These are a type of surety bond. They are typically used in construction contracts, and they guarantee that the contractor will complete the project as per the agreement. 

If the contractor doesn’t complete their contract, the bonding company will step in and cover the cost of any damages or losses incurred by the project owner.

Performance bond are a way to protect yourself from financial losses if your contractor fails to complete their end of the bargain. 

They provide peace of mind and can help you avoid costly legal battles. If you’re thinking about entering into a construction contract, make sure you understand the role of the bond. They could be the difference between a successful project and a complete disaster.

Do You Need a Performance Bond?

Now that you know what performance bonds are, you might be wondering if your business needs one. The answer to this question depends on:

Size of the Project 

You need to consider the size and scope of the project. A performance bond might be a good idea if it’s a large project with a lot at stake. 

It will give you some protection in case things go wrong. 

Risk Level 

You also need to think about the risk level. If there are a lot of risks involved, then the bond can help mitigate those risks. 

For example, if you’re working with a new contractor, they might require a performance bond to protect themselves from the risk of working with someone who has no track record. 

In this case, the bond would be for the contractor’s benefit, not the project owner. 


You need to think about the cost before buying the bond. Performance bonds can be expensive, and they’re not always necessary. 

Before you decide to purchase a bond, make sure you weigh the cost against the potential benefits. Getting a performance bond is a big decision. You should understand all of the factors involved before you decide.

Purchasing a Performance Bond 

If you’ve found out that your business needs a bond, you need to purchase one. 

Decide the Seller

You can buy a bond from a surety company or an insurance company. You need to ensure that the company you’re working with is reputable and has experience with performance bonds. You should shop around and compare rates before you make a decision.  

Fill the Application 

Once you’ve found a company you’re happy with, you’ll need to fill out an application and provide some financial information. The company will review your application and then decide whether or not to approve you for the bond. 

Approval and Premium Payment

You’ll need to pay the premium if you’re approved, typically a percentage of the total bond amount. The premium is generally paid up front, but some companies allow you to finance it. 

Once the bond is in place, you’ll be protected if your contractor fails to complete the project. You can claim the bond and receive compensation for any damages or losses incurred if this happens. 

Making a Claim 

Steps to follow when you need to claim the performance bonds are:

Notify the Company

If you need to claim your bond, the first step is to notify the surety company. You will have to provide them with documentation of the contractor’s default. This might include a copy of the contract, invoices, and estimates for repairs. 

Investigation of the Claim

The bonding company will investigate the claim and decide whether or not to pay it. They will look at the evidence you’ve provided and choose based on that. 

Payment of the Claim

If they approve the claim, they’ll cut a check for the bond amount. 

You can then use this money to cover the cost of repairs or any other losses incurred. The surety company will also take steps to recover the money from the contractor. 

Denial of the Claim 

If they decide to deny the claim, they will provide you with a written explanation of their decision. 

Appeal the Decision

If you disagree with the surety company’s decision, you can appeal it. You’ll need to submit additional documentation and evidence to support your case. 

The surety company will then review your appeal and make a final decision. 

Get Help from a Lawyer

If you are discontent with the final decision, you can get help from a lawyer. They can help you understand your options and rights under the contract. 

Before you decide, consider the cost against the potential benefits and talk to a reputable surety company. The lawyer can help determine whether or not a performance bond is right for your business. 

Also read Document Drafting Tips: What a proper contract should look like.