A performance bond, also known as a performance guarantee, is a financial security—typically issued by a bank or insurance company—that a contractor must provide upon contract award. It ensures that if the contractor fails to meet contractual obligations—such as completing works, supplying goods, or delivering services—the contracting authority can claim compensation or secure completion by others using the bond. In many public procurement contracts, especially larger-scale or construction projects, the performance bond is set as a percentage of the contract value, and it provides a vital safeguard for the buyer.
Although not universally mandated by EU procurement directives, performance bonds are commonly used where high-value or high-risk contracts are involved. Authorities may require them to manage financial risk, ensure commitment, and protect cash flow—particularly in long-duration or technically complex contracts. The bond acts as a risk mitigation tool, protecting the contracting authority from losses due to non-performance or contractor default.
In practice, performance bonds give contracting authorities peace of mind and help ensure project completion. They serve as both a deterrent against underperformance and a financial remedy if difficulties arise. For contractors, arranging a bond involves securing a surety facility and accounting for its cost when bidding. Properly structured performance bond conditions—and reasonable percentages—help maintain fairness and protect both parties in the procurement process.
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