Performance bonds are like Letters of Credit in that they provide insurance for the parties involved that they will be paid. Letters of credit are an example of an international performance bond. Performance Bonds work in a similar way and protect the various parties involved in a transaction.

Performance Bonds are usually granted by the supplier's bank who will agree to honour work undertaken by their customer. A Performance Bond is a legal document and as such is set out against measurable performance indicators and timescales. Failure to comply with conditions of the Bond will result in the Bond being called up. Because of this risk, Performance Bonds are usually only available to well known, credit worthy clients of the Banks. The client pays the bank a fee plus interest on the level of Bond.

Performance Bonds are particularly useful in:

• The construction industry
• The travel industry

In the construction business a property development owner may secure a performance bond so that he or she is guaranteed to be paid should the contractors default on their commitment. Performance bonds are common in local authorities and government department building contracts because they ensure the project will be completed should the contractor default. Money will be paid against the bond which will allow the project to be completed and/or allow remedial work to be undertaken if something goes wrong after completion.

In the travel industry performance bonds such as ABTA or IATA bonds ensure that the travel agent is covered and the customer is protected should anyone in the chain of supply default on their part of the package. For example if a customer is stranded overseas after their airline goes bust it is these bonds that ensure the traveller gets home.

Performance bonds have been around since the Roman times and have offered insurance against default of contractors involved in the completion of a project.

When is it used?
Performance Bonds are used to insure payment through the supply chain when more than one business is involved in delivering the final product or service. Performance Bonds are often used therefore in the travel and construction industry to bring peace of mind to customers (and the business owners supplying the service) that should anything go wrong at no fault of theirs they will receive financial compensation.