<P> Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects . Another example of this use is in commodity contracts where the seller is asked to provide a Bond to reassure the buyer that if the commodity being sold is not in fact delivered (for whatever reason) the buyer will at least receive compensation for his lost costs . </P> <P> Performance bonds are generally issued as part of a' Performance and Payment Bond', where a payment bond guarantees that the contractor will pay the labour and material costs they are obliged to . </P> <P> Surety bond companies calculate the premium they charge for surety bonds based on three primary criteria: bond type, bond amount, and the applicant's risk . Once the bond type, amount, and applicant risk are adequately assessed, a surety bond underwriter is able to assign an appropriate surety bond price . </P> <P> Surety bond companies have actuarial information on the lifetime claims history for each bond type . Over time, surety bond underwriters are able to determine that some surety bonds are more risky than others . For example, a California Motor Vehicle Dealer bond has significantly more claims than a straightforward notary bond . If a given surety bond type has paid out a high percentage of claims, then the premium amount paid by applicants will be higher . </P>

Importance of a performance bond in a contract