Performance Bond Guarantee

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A performance Bond Guarantee as the name suggests is a guarantee issued by Bank's indemnifying the person who wants a particular job to be performed and wants the service provider to confirm that the job will be done as per the agreed specifications and within the stipulated time. If this is not met then the guarantee can be encashed and the same will be paid by the Bank provided the conditions mentioned in the guarantee are fulfilled.

This is primarily used in the construction industry wherein timelines are very critical and the landlord requests the developer to provide a performance guarantee to ensure that the work is complete within the time agreed and also as per his requirements. Incase the developer fails to deliver the project and the reason for the same were within his control (provided this clause is mentioned in the guarantee), the landlord has to provide a
report from a consultancy which is not related to any of the parties confirming that the work has not been completed as per the requirements and then he can request the Bank to encash the guarantee and transfer the funds to his account.

In case the guarantee was a secured guarantee, the Bank will inform the customer who requested for a performance bond guarantee and use the security margin to pay the guarantee amount. But incase the guarantee was issued without any security then the Bank will have to bear that risk and will be obliged to pay the amount from its own pocket and can followup with the customer for payment at a later stage.

The developer requests for a performance guarantee only when he sure that the project will be completed within the stipulated time period and as per the requirements provided by the landlord. Else, he faces the risk of partially completing the project and also loosing the complete guarantee value. In any case, if a claim is submitted to the Bank to pay a guarantee, the Bank should the pay the amount maximum within 2 working days.