What is a performance bond?
Many people and contractor business owners at some point ask the question, What is a Performance bond? In short, a Performance Bond is a guarantee that a contractor will complete a construction project according to an agreed upon contract. Seaman’s Insurance Group is Florida’s Premier Boutique Independent Surety Bond and Insurance Agency. We have access to the most competitive surety bond companies, aka Sureties.
A performance bond guarantees a project will be completed satisfactorily. This requires having collateral property or investments to back up the requirements of the surety. A performance bond is usually issued by a surety. The surety will also require a general indemnity agreement (GIA) be signed by the purchaser of the bond, partners of the company and their spouse.
What are performance bonds used for?
When a developer wants to protect the investment made in a venture, the contractor that won the bid is required to provide a performance bond before work can begin. Often times bid bonds are required prior to bidding for a contract. Bid Bonds, Performance Bonds and Payment Bonds go hand in hand.
If the contractor fails to complete the project based on the agreed upon contract, the project owner (party that required the bond) can file a claim on the performance bond. If the claim is valid, the surety company that issued the performance bond will make sure the contractor compensates the harmed party.
Bid Bonds and Performance bonds are often issued in conjunction with each other as are Performance Bonds and payment bonds. They are the most common construction bonds.
How Do Performance Bonds Work?
Government entities and private sector organizations require performance bonds and payment bonds for projects. Performance bonds and payments bonds for government projects are normally required for projects such as: building bridges and roads, & much more. If a contractor that was required to purchase a bond does not complete the project specified in the contract the surety bond issuer may pay for the completion of the project or hire another contracting firm to complete the project.
A performance bond protects the owner against potential losses in a case of a contractor that fails to perform or is unable to deliver the project required by the contract. Sometimes the contractor defaults or might declare bankruptcy. In situations like this, a surety would be responsible for paying the owner for the losses. Such compensation is defined as the amount covered under the performance bond.
Payment from the performance bond is available only to the project/property owner no one else can make claims against the bond.
Documents Required for a Performance Bond
Surety Bond and financial institutions have different requirements depending on the contractor, the volume of the project and the degree of difficulty. Usually, surety companies will ask for the following information:
- Two years of CPA-prepared financial statements, maybe more.
- A copy of the contract.
- A Performance Bond Application.
- Owned real estate may help the contractor qualify more quickly.
Performance Bond Cost
Contractors required to provide performance bonds to meet contractual requirements is very common. When you bidding for the work, may be difficult to provide specific costs that will cover the performance bond unless you have a record that can be used to justify the cost. A contractor may expect the cost of a performance bond to be approximately 1% of the contract value. Sometimes when the contract value is over $1 million, the premium might range between 1.5% and 2%. The price per thousand depends heavily on the credit-worthiness of the builder. Just because credit may not be great or even good, does not mean that you won’t be able to secure a bond.
Normally, due to the scope of the project and insurance requirements, the performance bond is combined with the payment bond under one single bond.
How to Apply for Your Bid Bond and Performance Bond
Most Bid Bond and Performance Bond application questions include:
- How much is the bid?
- When is the bid date?
- Have you ever been bonded before?
- If you have been bonded before?
- What types of projects and how much were they for?
- How long has your company been in existence?
- What is your personal credit score?
- Some situation may call for escrow accounts to be established or even SBA accounts.
If your project will be contracted for more than $250,000, you’ll be expected to provide additional financial information. Once financial records have been reviewed, the application approved and payment has been received, the surety will issue the bond.