Performance bond

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

A performance bond is a bank guarantee that a contractor will perform a contract: if it does not, the principal who required the bond — the developer or the owner — can call on the bank for a stated amount, often a percentage of the contract value. The bank pays on demand and then claims the amount from its own customer, so issuing a bond is lending in waiting, approved and secured as if the money might be drawn. A bond that should have lapsed at practical completion but was never returned is exposure the business has forgotten and the bank still carries.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.