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Performance bonds serve as a financial guarantee that a contractor will fulfill their contractual obligations, ensuring both the client and the project receive a level of protection against potential issues. One notable downside of performance bonds is that they can increase overall project costs for contractors.

When a contractor is required to obtain a performance bond, they typically must pay a premium to the surety company providing the bond. This added expense can be significant, especially for larger projects, and may lead contractors to increase their bids to cover these costs. Consequently, clients may end up facing higher overall project expenses indirectly due to the required performance bond.

Understanding this dynamic is essential for stakeholders in contract management, as they must balance the need for risk mitigation provided by performance bonds against the potential for increased costs that could affect project budgets and contractor selection.