What is a Performance Guarantee?

Performance Guarantee Bond

performance bond application

A performance guarantee is typically used in the industry as a synonym of a performance bond. For some people, there is a literal translation and then there is the synonym. Let’s look at both.

A true performance guarantee is a guarantee made by one party regarding the performance or action on a specific task. In a typical contractual situation, such as a construction site, the guarantee is provided by the company that is actually doing the work. In this situation, the business is providing just a bit more than a contract. In addition to the contractual remedies upon the end of the job, the company is providing a guarantee that the work will be done timely and according to the specifications within the agreement. This provides several types of implied warranties of performance.

Another type of true guarantee is when the owner of the construction company provides a guarantee on behalf of the company. This personal guarantee will make sure that the company does the work timely and usually is a good indication that the work product will be of the quality needed. That’s because the owner is now personally invested – even more than just having their company invested.

The final type of performance guarantee is the performance bond. A performance bond, which many times is written in conjunction with a payment bond, is a guaranty that the company will provide the work timely and according to the terms of the contract. However, unlike a guarantee, the performance bond is provided by a third party. This third party (normally an insurance company, like Zurich or AIG) is the one that has underwritten the company. So, if there is a dispute regarding the contract, the owner will contact the surety. If it is a valid dispute, the surety will find another contractor to finish or fix the job. If the surety is unable to do so, it will pay damages to the owner of the job. The surety will then try and recover those payments, including attorneys fees, costs, etc. from the contractor.