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A performance bond is a surety bond issued by an
insurance company to guarantee satisfactory completion of a project by a
contractor. For example, a contractor may cause a performance bond to be issued in favor
of a client for whom the contractor is constructing a building. If the
contractor fails to construct the building according to the specifications
laid out by the contract (most often due to the bankruptcy of the
contractor), the client is guaranteed compensation for any monetary loss up
to the amount of the performance bond.
Performance bonds are commonly used in the 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). The term is also used to denote a collateral deposit intended to secure a
Futures contract, commonly known as margin. Performance bonds have been around since 2,750 BC and, more recently, the
Romans developed laws of surety around 150 AD, the principles of which still
exist.
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