What Is a Performance Guarantee

This is a bond that says that either a service or product lives up to the assurance and also continues to be so for a stated period of time. In business sense there are many such guarantees, like that are made by individuals, third parties and when the firm is hiring sub contractors. The performance guarantee is different for different clients. For example it might sound diverse to consumers using the product and very different to banking firms that gives loans. Both are completely different.

For consumers it is a guarantee for them to use the products, like for example a guarantee given on mosquito repellent that they will not enter your house if used. This is not just a promise but guarantee of eminence for future. Other category of performance guarantee is found in educational institutions, for example the university may guarantee scholarships to students who perform well in the first semester and will continue to get the same if they maintain the record through out the academic year.

Companies have a variety of performance guarantee. The bank that grants loans to company’s expect them to perform well so that they get there returns on time. They expect some quality business from them and hence guarantee them lower interest rates for higher performance. Businesses that are into outsourcing some part of there work also expect some kind of guarantee in the means of improved performance.

When there are some third parties involved business may guarantee the performance and may have to pay penalties as well if there work is not satisfactory. When third parties are involved there is always a bond written by the bank or insurance company that is given to the primary client. This performance bond assures payment of some money if the third party fails perform as per the written bond. The term of guarantee period will normally be for the time period the debt or loan is taken for.

To decide whether a Performance Guarantee is required or not, the respective clients should check if it is required by law to get one. When it is legally required, clients may waive the safeguards provided in the performance guarantee. Performance Guarantee may take any one of the following that are mostly acceptable:

  • Indemnity with a client company
  • Guarantee obligation of deposit document.
  • Letter of acknowledgment
  • Cash

The performance guarantee should be such that it covers all the necessary improvement costs to meet the standards set as per it.

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