Bond
A written obligation guaranteeing payment or performance; commonly a surety bond (contractor guarantees project completion) or performance bond (guarantees contract fulfillment to a third party).
While straightforward in theory, many businesses fail to actively track obligations tied to this concept - often resulting in missed deadlines, unintended renewals, penalties, or loss of contractual rights.
US Law · For business owners and foundersWhat is a Bond?
A bond is a written obligation in which one party (the surety) guarantees the performance or payment obligations of another party (the principal). Bonds are common in construction, government contracts, and public works. If the principal fails to perform or pay, the obligee (the party benefiting from the guarantee) can claim against the bond to recover losses.
The most common business bonds are performance bonds and payment bonds. A performance bond guarantees the principal will complete a project or contract. A payment bond guarantees the principal will pay suppliers and subcontractors. Bid bonds guarantee that if a contractor's bid is accepted, the contractor will sign the contract.
Bonds differ from insurance. The surety (bond issuer) has a legal right to recover from the principal (contractor) if a claim is paid. With insurance, the insured has no right of recovery. This means a contractor with a bond is financially liable to the surety for any claims paid.
In practice, many teams rely on a contract expiry tracking system to stay on top of dates and obligations tied to clauses like this.
Key Elements
Three-Party Relationship
A bond involves three parties: (1) the principal (contractor, the one owing the duty), (2) the obligee (owner or government, the one to whom the duty is owed), and (3) the surety (bond issuer, who guarantees performance).Written Promise
The surety makes a written promise to the obligee that if the principal fails to perform, the surety will either complete the performance or pay damages up to the bond amount.Bond Amount (Limit of Liability)
Bonds specify a maximum amount payable. For a $1 million construction project, a performance bond might be for 100% of the contract price ($1 million).Right of Recovery
If the surety pays a claim, it has a legal right to recover from the principal. The principal is ultimately responsible; the bond is only a guarantee.Conditions Precedent
The obligee must usually give the principal notice and a reasonable opportunity to remedy before claiming against the bond.Real-World Example
Your company bids on a $500,000 government construction contract. The agency requires a performance bond for 100% of the contract ($500,000). Your surety company issues the bond. Three months into construction, you run out of funds and abandon the project.
The obligee (government agency) can claim against the performance bond. The surety either completes the project or pays the government up to $500,000 in damages. The surety then has a legal right to recover from your company - the ultimate responsible party.
This is why many businesses adopt automated deadline tracking to ensure no critical dates are missed before they pass.
Sample Clause Language
Performance Bond Requirement ClauseWatch Out For
Bonds are not insurance for the contractor
If you fail to perform and the surety pays, you are liable to the surety for the full amount plus interest and costs. Bonds are a guarantee, not a safety net.Bond amount may be insufficient
If your total losses exceed the bond amount, the obligee must absorb the difference. Require adequate bond coverage.Notice and opportunity to cure required
Most bonds require the obligee to give the principal notice of default and a reasonable opportunity to remedy before claiming against the bond.Bonds can be difficult to enforce
Sureties often dispute claims on technical grounds. Document the contractor's default carefully to support any bond claim.Contractor costs for bonds increase project price
Since bonds cost 1-3% of contract value, contractors factor this into bids. In competitive bidding, bond requirements increase costs.Don't let bond deadlines catch you off guard
Key dates tied to bonds - renewal windows, expiry cutoffs, notice periods - can easily slip through the cracks when tracked manually. Missing them triggers automatic extensions, penalties, or lost rights. ExpiryEdge tracks every critical deadline and sends automated reminders before they're due - so nothing slips.
Instead of relying on spreadsheets or manual follow-ups, a centralized renewal reminder system ensures every deadline is visible, tracked, and actioned automatically.
How to Use This in Your Favor
Require performance bonds on all significant contracts
For projects over a certain value (e.g., $25,000), always require a performance bond. It provides a financial backstop if the contractor abandons the project.Require payment bonds alongside performance bonds
A payment bond protects you against unpaid supplier and subcontractor claims. Many jurisdictions require both on public works.Specify bond amount as 100% of contract price
A bond amount equal to the full contract price ensures coverage for the full scope. Smaller bonds leave you with unprotected risk.Document contractor defaults for bond claims
Keep detailed records of any default: dates, communications, evidence of non-performance. This documentation is critical if you need to claim against the bond.Related Terms
Frequently Asked Questions
What is the difference between a performance bond and a surety bond?
A performance bond is a type of surety bond. "Surety bond" is the broader category; performance bond specifically guarantees contract completion. Other surety bonds include bid bonds (guarantee bid submission) and payment bonds (guarantee payment to suppliers).
Who is liable if a contractor fails - the surety or the contractor?
Both are liable. The surety is liable to the obligee (the project owner). The contractor is liable to the surety for recovery. The surety's liability is limited by the bond amount.
How much does a performance bond cost?
Bonds typically cost 1-3% of the contract value per year. A contractor on a $500,000 project might pay $5,000-$15,000 annually for the bond. Cost depends on the contractor's credit history and experience.
Can I claim against a contractor's bond if they are late?
That depends on the bond terms. Performance bonds usually guarantee completion, not on-time completion. If the contractor is late but ultimately completes, you may not have a valid bond claim. Check the bond language carefully.