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For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.
Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects.
Performance bonds are generally issued as part of a 'Performance and Payment Bond', where a Payment Bond guarantees that the contractor will pay the labour and material costs they are obliged to.
Performance bonds have been around since 2,750 BC and, more recently, the Romans developed laws of surety around 150 AD, the principles of which still exist.
- completion guarantee
- General contractor
- Independent contractor
- Shop drawing
- Submittals (construction)
- Surety bond
- ^ "Performance bonds". Coface UK. http://www.cofaceuk.com/CofacePortal/UK/en_EN/pages/home/what-we-do/protection/surety/performance-bonds. Retrieved 2009-02-23.
- ^ Good Faith Money, http://investopedia.com/terms/g/goodfaithmoney.asp, retrieved December 04, 2006
- ^ Margins, http://www.oxfordfutures.com/futures-education/margins.htm, retrieved 17 September 2009
- ^ "Payment Bond". Bryant Surety. http://www.bryantsuretybonds.com/Surety_Bonds/Contract_Bonds/Payment_Bond.html. Retrieved 2009-02-23.
- ^ Russell, Jeffrey Burton (2000). Surety bonds for construction contracts. Reston, Va.: ASCE Press. pp. 9. ISBN 0-7844-0426-7.
- Surety Information Office - An association dedicated to suretyship in the United States
- National Association of Surety Bond Producers - NASBP is the association of and resource for surety bond producers.
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