What is a Performance Guarantee?

A performance guarantee is a promise made that either a service lives up to certain expectations, or that a product will continue to perform well over a stated time period. In the business world, there are many such guarantees, each created in individual ways to define the company's commitment and extent of future responsibility. Sometimes, third parties guarantee performance of something too, especially when employing subcontractors.

For consumers, the guarantee might sound something like the following: “We guarantee if you use our exterminator service, you won’t have any more cockroaches or we’ll come back to fix the problem for free.” This is not just an assurance of quality in the initial service, but an assurance of quality in the near future. To save money, the exterminators might also specify a time period during which they'll provide the service, or they might be guaranteeing free service forever, with each new roach encroachment. The goal, though, is to make the customer choose the services of a business because that business promises to stand by its work.

Other guarantees are possible. For example, there are many private schools that guarantee that students can finish an undergraduate degree in four years, and if they don’t, they get a fifth year free. This offer can look pretty good when state schools are cutting budgets and classes dramatically, and might make a student lean toward private education, even though it’s more expensive.

Businesses may create multiple types of the performance guarantee, too, when they opt to work together. A bank that hires a custodial service to come in at night may want assurances of a certain level of quality. Companies that outsource some of their business to other companies want guarantees too, especially of improved performance. Whether these ideas get formally expressed may be up to the individual companies, but a company looking to contract with someone else really doesn’t want to have switch companies in the near future. They may not only look for quality assurance but demand their money back if the expected quality isn’t delivered.

Occasionally, there are agreements where a third party subcontractor is used, but the subcontractor isn’t monetarily liable if performance isn’t up to par. Instead, some other business may guarantee the performance and have to pay fees or fines if it isn’t satisfactory. Governments occasionally license businesses to do certain types of work, like improving energy efficiency in buildings. The company that invests in such work would not go back to the subcontractor if the work hadn’t improved energy efficiency. Instead, it would go straight to the government for recompense.

Anyone attracted by a performance guarantee always needs to look behind the bold print or summations of the guarantee. In other words, reading the fine print is valuable to determine the strength of the guarantee and the true intent of the company. For business deals, especially those of magnitude, legal counsel can help make certain that a guarantee is legally enforceable and as good as it sounds.