The Performance Bonds Company – Payment and Performance Bonds
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What is a Performance Bond?
A performance bond is a three party contract that is issued by a surety (typically an insurance company, but could be an individual) as a guarantee that one party will perform according to the terms of the agreement. The three parties are the Obligee (the party that gets the benefit of the performance bond), the Obligor (the party whose performance is being guaranteed), and the surety.
What is a Performance Bond in Construction?
In construction, a performance bond is known as a contract bond. It guarantees the completion of the contract according to its terms in both time and scope.
What is the difference between bond and bank guarantee?
A bank guarantee is usually one that provides monetary compensation from a third party. Further, the third party is not a party to the original contract. So, in order to collect on the guarantee, the third party must be included in a separate action. This is different from a performance bond, which has all three parties as a part of the original contract and the Obligee can collect or require performance directly from the surety.
How does a Performance Bond work?
A performance bond protects the Obligee against the non-performance of the Obligor if the Obligor does not performan according to the terms of the agreement. If the Obligor (the contractor) declares bankruptcy or defaults, then the surety will compensate the owner for any damages, or find a third party that will finish out the contract. Any payment that is due can only be collected by the owner/Obligor.
Why is a performance bond required?
In government contracts, a performance bond is required because of the Miller Act. Most states and municipalities have passed similar acts of legislation, called Little Miller Acts. In private party contracts, the Obligee wants a performance bond so that they will be protected against delays and potential losses if the Obligor (the contractor) is unable to perform according to the terms of the contract.
Who pays for a performance bond?
The performance bond cost is made a part of the contractual price. Although it appears that the Obligor is paying for the bond, it is really the Obligee that pays for it as it becomes a part of the contract.
What does a P&P bond cost? Can I get one with bad credit?
The cost can vary widely from company-to-company, but some general guidelines are that the rate is 3% for all bonds that are $250,000 and less. For bonds over this amount, we use a graduated scale for the bond rate. In general, most bonds are going to cost between 0.75%-3%. For companies with bad credit, the bond rate can be higher as there is more work involved to get one issued (and that work is much preferred to an expensive bank guarantee). We work with you to present your financials in the best light to the surety so that you can get on with your work.
Can I get a P&P Bond online?
Of course! What do you think we are, chopped liver?
What’s a Payment Bond?
Payment bonds are a subset of surety bonds. These are typically required on construction projects. They provide assurance that the contractor (also known as the obligee) will pay all laborers, material supplier and contractors. Thus, the owner of the property knows that there will not be a mechanic’s lien placed on the property (which would interfere with their ability to market the property once the project was completed).
What’s the difference between a payment bond and performance surety bond?
This may be easiest to explain with a good example.
Let’s assume that Gotham hires Falcone Contracting as the general contractor to build a mental hospital (and let’s call that facility, um, Arkham Asylum). Falcone Contracting then hires several other subcontractors to work on Arkham, such as Joker Construction, Penguin Plumbing and Supply, and Mr. Freeze’s HVAC.
Let’s further assume that after constructing half of Arkham, Falcon Contracting goes out of business, leaving the other half to be finished later. Further, let’s assume that 20% of what was actually done was defective (10% of the total). Finally, let’s assume that Falcone Contracting did not pay Joker, Penguin for their work at all, and only paid Mr. Freeze for his labor, but not his supplies.
The performance bond would protect the owner (in this case, the city of Gotham) from the non-performance of Falcone Contracting, as well as the defective work of Falcone. Thus, the surety would have to find someone who would fix the 10% completed as well as complete the remaining 50% of the proje ct (or pay damages to Gotham in the amount of the bond). However, the bond would not provide any protection for Joker, Penguin or Mr. Freeze. They would be forced to put a mechanic’s lien on Arkham.
Fortunately, Gotham was smart about this. Not only did they require Falcone to get a Performance Bond, but they also required them to get a Payment Bond. Thus, the surety company now has to pay Joker Construction, Penguin Plumbing and Supply in their entirety, and Mr. Freeze’s HVAC for the materials that they purchased.
Here is a Owner’s checklist for getting bonded.
How are Claims Made on Performance Bonds?
These are a type of indemnity bonds and should not be confused with an insurance policy. In a typical insurance policy, the insurer has to defend the insured as well as indemnify them. More importantly, they are not able to get repaid from the insured for the amount of any loss or any costs associated with the claim. Compare that to a claims on performance surety bonds. First, the surety looks to the contractor to make sure that there it is a valid claim and, more importantly, the surety will ask the contractor to indemnify it for any claim damages and lawsuit fees.
Who benefits – Performance Bond Company?
Subcontractors, laborers and suppliers are the ones that benefit from a payment bond.
The problem generally arises for a general contractor as they are unaware that there is a problem until they get a claim filed against them. Sureties also do not like payment bonds as they can, in some cases, end up paying for work twice.
Let’s go through an example. Let’s assume that Riddler Materials was not paid by Joker, even though Falcone made sure that Joker received their payment on time. So, Falcone would not even know that there was a problem (and would further assume that everything was just fine) until Riddler made a claim on the payment bond.
Falcone, if they were being diligent, would require a payment bond from Joker so as to eliminate this double payment risk.
How do Bonds Differ from Insurance?
Insurance is written so that the risk of loss is spread among multiple parties while a bond is written with the assumption that there is not going to be any loss (although loss does occur). Thus, bond premiums are MUCH lower than insurance premiums. If bond rates were written in the same manner as insurance, then the cost would be somewhere in the 40% range – which is simply not sustainable for any construction activity.
Sample bond form?
How do bonds work?
These come with guarantees from a third-party guarantor instead of the construction contractor. This type of security bonds are usually taken out with the help of an insurance company or bank institution and this will cover the entire cost of the construction project if the contractor fails to deliver. They generally take a much longer approval because they need to go through various institutions. They may also be associated with extra costs as an agency may need to be used to create the security bond. If the contractor is unable to complete work it can be extremely costly for them. Because of the extended approval process and extra costs only a few different types of construction projects may require a bond.
- Bond insurance cover – What does bond insurance cover? It covers the loss associated with one party not living up to the terms of any contract
- Bank performance guarantee – A bank performance guarantee is another name for a performance bond.
- Bid bond bank guarantee – a bid bond bank guarantee is another name for a bid bond.
- Performance security form – this form is used by most Obligees to show what is being covered under the bond.
- Surety agreement sample – we have lots of sample forms that we use to help everyone understand what it is that we do and what is covered.
- Difference between bonded and insured – a bond is specific to a single entity and is underwritten based on that job and the risk of loss, which is assumed to be zero. Insurance on the other hand is a risk sharing tool where losses are assumed. If bonds were written like insurance they would be much, much more expensive.
- Company guarantee – a company guarantee can be used in lieu of a surety bond, but is much riskier to the Obligee
- Bond premium – the bond premium is based upon the size of the job. For bonds under $400k, a good rule of thumb is 3% of the job; larger jobs are cheaper
- Contract of suretyship – this is the agreement with the bond company
- Surety contract – a surety contract is used to assure that a surety can recover from the Obligor
- Construction guarantee – this is another name for performance bonds
- Obligee bond – the Obligee bond is provided to make sure that the party that is being protected is actually being protected
- Bonded employee – a specific employee can be bonded (called a fidelity bond)
- Surety agreement – the surety agreement is the actual form used to provide assurance
- Bond underwriter – this is the individual at the surety company that determines the risk and pricing of any performance bond
- Performance guarantee contract – this is another name for a performance bond contract
- difference between insured and bonded – being insured is the ability to share risk with a pool of other people. Bonded is more like a guarantee, where the risk is not being shared, but instead falls on another party. If bonds were priced like insurance, they would be prohibitively expensive.
- collateral bond – a collateral bond is a bond where the surety does not provide the underlying bond without some sort of other collateral. The collateral is usually preferred to be liquid, such as an irrevocable letter of credit, but some sureties will also take other pieces of collateral, such as certain equipment or even real property.
- the guarantee insurance – sometimes a surety bond will be called guarantee insurance, although as you’ve seen above, a performance surety agreement is not insurance. Instead, it’s a three party agreement to guarantee the performance of an underlying contract.
- what is bond rate – the costs can depend on several factors. The first, of course, is the type of a bond. For performance bonds, the general starting rate is three percent (3%) of the contract. This amount will go lower as the contract size grows. For other bonds, the price is typically lower. For a probate bond, the standard price is around 1% and Notary bonds are usually priced using a fixed fee price for several years.
- being bonded and insured – some companies are both boned and insured. In these cases, the bond protects against a specific job or task, while insurance spreads risk across a pool of similarly situated companies.
- bond obligee – the bond obligee is the party that gets the benefit of the bond or underlying surety. Thus, if the Obligor defaults on its obligations, then the obligee will look to the surety to make it whole pursuant to the terms of the surety agreement.
- surety company definition – This is a company that provides surety on behalf of someone else. In most cases, a surety company is a division of a large insurance company, but as we discussed above, it can be another private company.
- performance bank guarantee – This is also called a performance bond. However, the performance bank guarantee does not have to make a claim for any payout to be given. Instead, the payout is given upon demand of the Obligee. Obviously, these are much harder to get than a normal performance bond.
- security bond definition – This is a bond that provides surety pursuant to the terms of another agreement. In the U.S., these are usually referred to as performance bonds.
- assurance bond definition – an assurance bond is a bond that provides a guaranty, or other surety assurance, based upon an underlying agreement. In the states, these are more typically called performance or contract bonds.
- cost of bond – the cost depends on the size and type of the bond. For most contract bonds, the price starts at three percent (3%) and then goes down based upon the size of the bond and the creditworthiness of the Obligor. The price can increase if the bond or Obligor is deemed risky. For notary bonds, these are super cheap while court bonds range from 0.5% to 2% of the assets.
- bond claim – This is when one party (such as the Obligee, a subcontractor or material vendor) makes a claim upon the job bond. The claim is then processed by the surety to see if the claim was timely made and that the dispute is valid. If the claim is valid, the surety will then pay, or get another contractor to finish the job, and then look to the Obligor for recompense.
- bank guarantee cost – the cost of a bank guarantee is typically three percent (3%) of the underlying job. However, these bonds are very difficult to get as the surety will require collateral in the amount of the bond being written.
- benefits of bonds – the biggest benefits of a bond is to the Obligee. The Obligee is assured that the Obligor will not mess up, and if the Obligor does have a mistake, then it will be taken care of. This helps facilitate commerce. For many Obligors, the benefit of getting a bond is the ability to get a job that they otherwise would not qualify for.
- licensed insured bonded – the trinity or holy grail of all contractors is to have all three of these. A contractor wants to be licensed, as well as insured. Being bonded, along with being licensed and insured, means that they can bid on any job they want as well as tell their customers that they are a “safe” company to do business with.
- contract surety – a surety can write a bond for many reasons, but one of the biggest reasons is to provide assurance based on an underlying contract. So, they become the contract surety on behalf of the Obligor.
- getting bonded for small business – when a small business gets a bond, they can then go out and bid on more jobs. Further, there is a marketing benefit to being bonded as well as the small business can now assure its customers that it is a stable company that is able to complete jobs.
- bond obligee – the Obligee to any surety bond is the party that receives the benefit of the bond. In a contractual situation, this is the owner of a project. Thus, if the general contractor is unable to perform, then the Obligee can look to the surety to make it whole.
- who is a surety – well, anybody can be a surety. All you need is for a someone to be willing to act on behalf of another. In the older days, sureties were typically individuals, as a wealthy individual would provide surety on behalf of another. That then evolved into companies providing surety to other companies. Finally, in the modern age, most sureties are large insurance companies, such as AIG or Zurich.
- bonding a company – the company that provides the bond is the surety and the company receiving the bond is the Obligor. So, when the surety is bonding a company, they look at the Obligor to make sure that there will not be any default under the bond to cause a claim and, if there is a claim, that the surety will not have to pay anything or can receive reimbursement from the Obligor.
- company guarantee bond – a company guarantee bond is the same thing as a performance or payment bond. The surety bond is guaranteeing performance on behalf of one company.
- performance warranty bond – This is also known as a maintenance bond. This bond is usually attached to a standard performance bond. The maintenance bond provides that the finished product will continue to perform as expected for a specified period of time, such as one year following completion of the job.
- on demand bond – These are quite different than a typical performance bond. In a normal performance scenario, any bond claim must first go through a verification process. This verification process will make sure that the claim is valid before the surety will pay. In an on demand bond, the surety pays immediately. Then, after that immediate payment, the surety will look to the company regarding recompense. As you can imagine, these are very, very hard to get.
- fully bonded and insured – most owners want their licensed contractors to be both fully bonded and insured. The insurance provides protection against normal business losses, while the bond is specific to the job at hand.
- guarantee bond – This is another name for a surety bond. This guarantees the performance of a party.
- surety insurance definition – surety is different than insurance in that it does not pool risk to be shared, but instead is written on a specific basis.
- what is a bid bond and a performance bond – a bid bond is one that is written to provide assurance that a contractor will take a job if they are awarded a job. Thus, the owner of the project gets some assurance that they won’t have to start the process over with another company. Performance bond protect the owner from any default in the actual performance of the job. Normally, in bid situations, the bid bonds are done at the beginning and then performance bonds are written once the contract is signed.
- surety underwriting – surety underwriting is done assuming no losses in the job or other surety. That is, the surety underwriter does not assume that a certain percentage of companies or people will default, but instead writes the bond assuming a no loss scenario.
- surety fee – the typical fee for a contract bond is approximately three percent (3%) of the contract price. This can go up based on the risk of the situation, but can also be decreased as the job size increases.
- commercial surety – in the modern age, most sureties are now commercial arms of large insurance companies. Thus, a commercial surety will write the bond based on their experience across multiple industries and using historical data.
- surety underwriter – the surety underwriter is the individual at the surety that is in charge of writing the bond on behalf of the surety. The underwriter analyzes the risk of the company that is wanting to be bonded and also the risk of the job at hand.
How do I get a bond?
Well, you should call us. Right now. The general process works like this: we will have you fill out a bond application and see if we can get you approved quickly. For larger bonds (think over $400,000), we ask for company financials and some other information to get the bond price lower. We can usually get smaller bonds approved in a day or two and larger bonds take just a bit longer.
P&P bonds – a P&P bond is another name for a performance and payment bond. The industry abbreviates it to P&P bonds. It’s also abbreviated as a p&p bond or p & p bond.
Construction Bond Details
What are Construction Bonds?
Construction bonds are a form of a P&P bond. Given that modern bonds have their roots in the construction industry, these terms are used interchangeably. A construction bond is a type of surety bond utilized by an owner of a construction project – thus the term construction bonds. It protects against a catastrophic event that would cause a major disruption of the construction project, such as the inability to complete the job by the general contractor, or the general contractor’s inability to pay his subcontractors, or finally the bankruptcy of the contractor. In addition, a construction bond can be a warranty bond to make sure that the job actually conforms to the specifications of the contract.
Like a typical surety bond, there are three parties to the bond. First, there is the surety company. This is the company that is guaranteeing the work of the general contractor. The general contractor is the obligor. The person that would be the beneficiary of the bond from a failure of the obligor (the general contractor) is the obligee – the owner of the property.
These are many times also called a Contract Bond.
How to Get the Lowest Construction Bond Rate
It’s a question that we are asked pretty consistently: How do we get the lowest contract bond rate possible? Well, construction bond rates can vary – the rate depends on the type of bond, as well as the bond agency that you end up using.
There are a number of ways that you can work to receive lower rates. By following these tips you can work to drive down the cost of your surety bonds. That way, you can make sure that you put more money back into your business or into the construction process (to deliver a higher quality result), as well as have less stress about your business finances.
Here is our most popular advice on ways for you to find the cheapest rates on construction bonds (outside of our top-ten that we posted):
Compare Bonds Among Companies
Compare bonds through multiple surety bond companies: certain agencies will be able to offer bonds from many different potential sources. Your bond agent should be choosing from multiple sources, which will allow you to drive the price of your bonds down because you will have more options to pick from. Long-established agencies generally have access to different types of surety bonds, or access to different underwriting criteria, so it’s important to shop around and pick an agency that has more options available to you.
Compare Different Types of Bonds
Don’t just consider a single type of surety bond. Some bonds are based on credit rating while others are based on tangible net worth. Go ahead and consider an agency that won’t look into your credit rating: some surety bonds require you to put up your own personal credit rating as well as the finances of your business. Going into a surety bond agency that doesn’t require any of your credit rating, especially if you have a poor credit history, is important to reducing the cost of your construction bond rates.
But be forewarned: if you have failed to deliver several construction projects or your business is experiencing some financial difficulty, there can be real problems when it comes to receiving a fair deal on construction bond rates.
Cheaper Can be Better
Look at projects that require cheaper bonds: certain construction projects don’t require the use of performance bonds or other fully-insured bonds. If you can find a construction project that only requires the use of the bid bond you can work to save money off of the total cost of your construction bond process.
The less amount that you have to tie up with financial institutions, and the less people that you have to involve in the bond purchasing process, generally means the less cost to you in the end. Pick your construction projects wisely and you can lower the cost of construction bond rates for your company.
By using these tactics you can find the lowest rates available.
Construction Guarantee Bond
A construction guarantee is an agreement that provides assurance that the construction project will be finished timely and according to the specifications within the contract. The construction guarantee can be done in several different ways.
One way is to have the construction company guarantee its own work. This is a first party guaranty. A first party guarantee is good in that the company is providing more than just contractual assurance, but also additional good faith and good works assurance that they will perform. What this does is allow the owner some peace of mind that the company will not simply look for loopholes in the contract, but the implied understandings between the parties will also be enforceable.
Another way is to have the construction company get a guarantee from its owner. This guarantee adds an additional element in that there is some “skin in the game” with regard to the project. When this occurs, the owner has an incentive to make sure that the company pays attention to the contract terms and also makes certain that the owner is left satisfied with the work.
Another good way is for the company to get a bond. A performance and payment bond is a three way contract instead of a simply guarantee. What happens is that the construction company looks for a third party to provide surety. This third party is typically a large insurance company, like AIG. AIG would then provide this surety through the performance surety bond to the owner of the property. If the contractor would default under the terms of the construction contract, then the owner would first look to the surety for remedy. The surety could then find another company to finish the job, or fix the job, according to the original contractual terms. Alternatively, the surety could pay the owner financial compensation as damages for the poor work. Then, the surety would look to the construction company for indemnification on this payment.
In Federal Government work, a performance/payment bond is required pursuant to the terms of the Miller Act. State and local governments have passed rules, known as little miller acts, that require performance and payment bonds at the state and local level.
How do Construction Bond Lines Work?
This is typically the total dollar limit that you have available for bonding with your individual company. This is sometimes called your bonding capacity. When you set up your account with your bonding company (surety) you’re usually given two different numbers for your construction bond lines. These two numbers are your single limit as well as the aggregate limit. The single limit in construction bond lines represents the total maximum bid that you can use with a single contract whereas the aggregate limit is the maximum total dollar value of bonds that you can have available for all of your construction work at one time.
When you first receive your construction bond line, it is usually represented by just two numbers. You might get something along the lines of 250,000 over 500,000 for a line. Basically what this means is that at any one time you can have construction security bonds out on two projects of $250,000 in value for your company. You can think of the aggregate line as a total credit limit for the amount of bonds that your company can have out whereas the single limit is more of a transaction limit for the total value of a single bond. Essentially these limits act based off of the value of your company to help protect your construction company and you as a contractor while ensuring you can still take out security bonds on any project that you complete.
There is no absolute guarantee that you will be approved for security bonds based off of your bond lines. These lines are simply placed as a guide for the maximum amount that you should be considering in any security bonds application. Make sure that you keep within your bond line limits or you could run into problems with your bond agency.
If you are extremely limited in your bond lines, a good surety agency will be able to tell you how you can increase your bond line limits (so that you can take on more projects). You can also reduce the total amount of surety bonds that you have out with the help of your surety bond agency. Agents can remove items from your work, which can help to free up more money with your aggregate bond line. It will take some negotiation as well as some help from your surety bond agency but you can make construction bond lines work for your company and understand them when you are approaching surety bond agencies.