From Dept of Health & Human Services, in a tutorial to state agencies:
While we agree that vendors must be held accountable for their performance, using one or a combination of the methods described above involves costs for contractors which are passed on to Federal and State agencies. Performance bonds, in particular, are costly because: a contractor must make a direct outlay of funds to acquire the bond; and the systems initiatives being bonded are costly, which affects the cost of the bond. This increases the bid price and the cost of the project.
Our experience is that, in cases where States have had problems or failures in systems projects, performance bonds would not have provided the compensation States seek. In these cases, performance problems most often stemmed from a lack of specificity in the Statement of Work (SOW) section of the Request for Proposals (RFP), and other matters including project management. When the project is effectively managed, performance issues are kept to a minimum.