Performance Bond vs. Surety Bond

Performance bonds and surety bonds are the same type of instrument, used to help define business contracts when an owner wants to hire a contractor to do specific work. In general, "surety bond" is a term used to describe all such bonds, while "performance bond" is used to describe a specific type of surety bond. Other types of surety bonds includes payment and bid bonds. None of these bonds should be confused with insurance or investment bonds.

A surety bond has three parties. The first party is the owner, the person hiring who wants a particular job done. Surety bonds, for instance, often deal with construction projects. Other surety bonds may govern specific services that the contractor, the second party, can offer. The purpose of any surety bond is to ensure that work is completed as required by the owner. If the contractor doesn't fulfill the bond, then the third party, the surety agent, steps in and examines the claim to see if the bond needs to be paid out to the owner.

The performance bond is one of the more common types of surety bonds. It typically governs one project that the contractor is working on, especially a construction project. Because the bond deals with performance, the owner can specify materials, time frame and other factors to ensure the project is completed according to specifications. The United States government often requires performance bonds, but they're common among large companies.

Payment and bid bonds are less common than performance bonds. A payment bond is a type of surety bond that affect subcontractors, hired by the contractor to help with the project. Subcontractors often want bonds that ensure they'll be paid by the owner no matter what occurs. Bid bonds are a type of bond that governs the bidding process for a project and hold the contractor to fulfilling their bid. Bid bonds often change into performance bonds once the owner accepts a contractor offer.

In an insurance policy, owners can make a claim if they feel the bond wasn't fulfilled. The surety agent then investigates according to the precise terms set out in the bond. For an insurance claim, the insurance company itself lays out the terms in its own policy and sends an investigator to inspect an event instead of a project.