contractor holding his bid documents for tender date


Contracts, regardless of what they cover, are pertinent in a variety of situations. Contracts don’t just protect one party. They usually protect everyone involved with the agreement. Regardless if you are the individual taking out the contract or the one requiring the contract, you need to understand how they work and what they require.

To make things even more confusing, there are a variety of contracts available for varying situations. For instance, there are construction bonds that are taken during construction projects. There are also performance bonds or contracts that can be taken out during that same project. 

A performance bond or contract will be one that is issued when there is an assurance of quality work needed. For instance, this type of bond or contract will offer assurance against the failure of the other party.

Whether a construction company fails to finish a job as promised or an individual doesn’t finish paying off a piece of property, these bonds can offer coverage and protection.

That being said, these types of bonds are usually utilized in construction projects or similar agreements. They are issued by an insurance company like Stokes Surety Bonds, and they ensure that a contractor completes a project per the terms of the agreement.


If you take the time to put in some research, you’ll discover that it is the Miller Act that is responsible for the requirement of these bonds in the United States. The Act was put in place to protect both the private and public sectors.

The performance bond is usually utilized in both the real estate and construction industries. Any time a construction project is undertaken or a real estate deal is made, the parties will have to agree on a $100,000 or greater bond. To learn more about this in detail, please take a look at how does a performance bond work?

The types of jobs that usually require performance bonds also usually go through a bidding process. The construction company usually had to obtain a bid bond by bidding on the job against competing contractors, and its turnaround time of a bid bond is extremely low. Once the company wins the bid, they will take out these bonds to ensure the owners of the project that the project will indeed be completed.

To learn more about bid bonds in detail, please take a look at the following links:

•  Meaning of Bid Bonds

Purpose of Bid Bonds

Bid Bonds in Construction

How Does a Bid Bond Work?

In some situations, an owner or investor may require a construction company or developer to take out these bonds as a guarantee that the work will be completed. Not just that the work will be completed, but that the work will be completed per the terms agreed upon.  


Performance bonds are similar to that of other bonds, given the fact that there are three main parties involved. All three parties have something to lose in these situations. And, believe it or not, these types of bonds can protect all three parties. It might seem like the performance bond only protects the buying parties or the individual requiring the bond, but that isn’t always the case. These bonds can protect the other parties from being sued.

That aside, in order to understand these types of bonds, you need to understand the three parties involved and the roles that they play in the contractor. The first party will be the obligee or the party requiring the bond. This party has to do nothing more than request the bond. The obligee is the individual buying the land or the one hiring a contractor.

The principal, on the other hand, will be the part party performing the work or the party making the sale. This will be the party that has to purchase the bond.

Lastly, the final entity involved in the contract is the insurance company or surety company. This is the company that provides the bond and financial assurance that the job will be completed or the product will be sold. Both the principal and the insurance company are responsible when the agreements of the contract cannot be met.  


When it comes right down to it, the performance bond is one that is provided to project owners to cover their concerns of a contract becoming insolvent before the job is finished. When situations like this occur, these bonds will ensure that the project gets completed. Whether it is financial complications or other damages that prevent the contract from being fulfilled, this bond will ensure that the project is completed. 

When performance bonds are taken out there are usually payment bonds involved as well. Both of these bonds work hand in hand and are integral to ensure that projects get completed in a timely manner as agreed upon. A payment bond is one that will cover payments to subcontractors or finish jobs. For instance, it might pay for an electrician to finishing wiring a home if the hiring contractor goes belly up during the project.  


Performance bonds can also be used for commodity contracts. This would be more on the real estate side of the business as opposed to the construction site. These bonds can be taken out to ensure the buyer of the commodity that their products will be delivered. It ensures that the commodity being sold is in fact delivered. If not the bond will compensate for lost costs. 

So, as you can see, the performance bond can offer protection in a variety of unique situations. Regardless, they are pretty much put in place to ensure that one party does not get taken advantage of. It is usually the party that is making the purchase.

For instance, a performance bond will protect a party from monetary losses when projects are failed or incomplete. If the project doesn’t get finished or finished per the agreed-upon terms, the client will be issued monetary compensation for the losses and damages that the contractor might have caused. 


As you’ve heard over and over again, performance bonds like the ones discussed here are heavily used in the real estate industry. They usually have to do with property development as well as property purchases. They not only protect certain parties from receiving low quality work, but they ensure that products are delivered upon as promised. They can also ensure that projects are completed.

For instance, there are many situations where the seller of a commodity might require a buyer to provide a performance bond.  During these situations, the bond will protect the buyer if the commodity is not delivered upon for some reason.

Whether the company goes belly up and can’t deliver or just chooses not to deliver, this bond will offer the financial compensation that protects the buyer. When certain requirements are not met, the obligee (the project owner) can file a claim against the performance bond. The claim will then go to the issuing party of the bond where it will be reviewed and eventually paid out.