Performance Bonds are a three-party guarantee where the Surety (Bond Company) provides a guarantee to an Obligee (Owner or Another Contractor) that their Principal (Contractor Providing the Bond) will complete the project according to the terms of the contract. In simple terms, the performance bond is guaranteeing that you are going to complete the contract without any problems.
The Miller Act requires performance bonds equal to 100% of the contract amount to be issued on all Federal construction projects over $150,000. Most states and municipalities have adopted “Little Miller Acts” that require performance bonds on state and local projects as well. The performance bond in combination with the payment bond provide a means for protecting the project from mechanics liens of subcontractors and suppliers.
Additionally, private owners may require performance bonds on their projects to make sure they get completed without additional costs. Also, Contractors may require performance bonds from their subcontractors as a way to manage risk and to ensure that the subcontract work gets completed.