What is a Performance Guarantee? Types of Performance Guarantee.

Topic Overview

  • Performance Guarantee is an agreement between a Client and a Contractor
  • Bank Offer a guarantee to the client on behalf of a contractor.
  • Bank will assure the client that work will be done as per the agreement.
  • There are two types of Performance Guarantee – Advance Payment Guarantee and Tender Guarantee.

Definition of Performance Guarantee

Performance guarantee is the agreement between a client and a contractor to assure the client to perform the contractor’s obligation as per agreement.

In this respect, the Bank gives an undertaking to its client that contractor will do their job as per agreement. If the contractor fails to perform his duties as per contract, the bank will pay the damage up to the guaranteed amount. This guarantee might include a clause to protect the client against the losses incurred if the contractor fails to perform.

Types of Performance Guarantee

There are different types of guarantees that a bank will offer to its clients and parties. Following two types of Guarantee is very familiar and commonly used in the corporate field. These two are:

Advance Payment Guarantee

Advance taken from the buyer is a very common practice in today’s business. In this respect, the bank provides a guarantee to the buyer that the money given by him to the seller against advance payment to deliver the required goods. If the seller fails to comply with the requirements mentioned in the sale agreement, the seller will be liable to back the amount to the buyer. The Bank offered the guarantee to back the advance payment for non-compliance with the conditions.

Tender Guarantee

This guarantee is also referred to as the ” Bid Bond” guarantee. Both in International Tender and Local Tender, this guarantee is used where a contractor/supplier is obliged to comply with the conditions as mentioned in the agreement.

Difference between Performance Guarantee and Financial Guarantee

Performance bank guarantee secures the beneficiary about the applicant’s performance. PBG is used in case of contract work where the applicant does not perform as per the contract, the bank will be liable for the applicant and pay the amount mentioned in the guarantee document.

Financial guarantee is when the bank assures the beneficiary about the applicant’s intent of paying money. If the applicant is unable to pay as per the contract, the bank will pay on behalf of the applicant.

The difference will be clear with an example. If A is taking services from B, and B is not sure whether A will provide the services, then A will provide a performance bank guarantee. Now, if A is not sure whether B will pay for the services, then B will have to provide a financial guarantee.


Finally, we can say, Performance Guarantee is the bond that gives the security of work and safeguards the company from probable losses that may arise from quality issues. Performance guarantee assures regarding the certain level of performance of the product or the services are delivered, commissioned, installed, etc.

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(Last updated on: 06.09.21)