A performance bond is a sum of money lodged by a contractor with a third party, typically a bank, which is forfeited in defined circumstances. The purpose is to compensate the client for lack of contract performance. For example, where a catering contractor is engaged to run a catering operation, the client may seek a performance bond to be lodged with a bank, which would be triggered upon the insolvency of the caterer, or the termination of the contract for poor performance. The scale of the bond would be calculated to equate to the switching costs of demobilising the incumbent and mobilising a new contractor. See also Sanctions.
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