Performance Bonds

Overview

A performance bond gives the party that commissions work or purchases goods financial protection if the contractor or supplier does not deliver as promised. It is commonly set at a percentage of the contract value and may be issued by a bank or an insurer, depending on the contract.

How it generally works

1. The contract requires a performance bond and states its value and duration.
2. The contractor or supplier applies to a bank or other provider.
3. The provider reviews the contractor's financial position and the contract.
4. If issued, the bond is delivered to the beneficiary and later released on completion.

Potential business use cases

• Supply contracts with significant delivery obligations.
• Construction, installation, or services contracts.
• Public or corporate tenders that require proof of capacity.

General documentation

Requirements vary by transaction, country and institution. Commonly requested items include:

• Signed contract or award letter
• Bond wording required by the beneficiary
• Company registration, tax, and identification documents
• Financial statements and a project profile
• Details of any counter-guarantee or security

Important considerations

• The provider can request security, and fees apply.
• Release conditions and expiry should be understood before the contract is signed.
• Whether a claim is payable depends on the bond wording.

FAQs