What are Performance Bonds?
Simply put, it’s a bond issued by a surety company (think large insurance company) that guarantees the satisfactory completion of a project or a job (i.e., a construction project). They are also called a Construction Bond.
We are the nation’s leading provider of performance bonds. Our expertise spans the entire range of bonds and we’ve worked extremely hard over the years to develop deep relationships so that we can offer you the absolutely best bond rate available. We work with you to present the best case scenario to the surety bond company. Then, we utilize our deep relationships with those companies to get the right bond suited for your specific needs.
How are we able to do this? Through a lot of hard work.
That’s how we’re successful. That’s why we’re the best. Hard work. Dedication. Experience. We’re the EXPERTS when it comes to bonds.
Here are some of the most Frequently Asked Questions that we get about Performance Bonds
What does it 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 a bond 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.
What is a Payment Bond?
Payment bonds are a subset of surety bonds. These bonds are typically required on construction projects (and many times are required along with a performance bond). 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 is the difference between a payment bond and performance 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 project (or pay damages to Gotham in the amount of the bond). However, the performance 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.
How are Claims Made on Performance and Payment Bonds?
Performance and payment bonds 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 claim on a bond. 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 from a Payment Bond?
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 does a Bond 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.
Can I get a Performance Bond online?
Of course! What do you think we are, chopped liver?
What about a sample bond form?
We have more information on collateral on our Contract Bonds page.
How do these bonds work?
These bonds 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. These types of bonds 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.
This is continued on our Contract Bond page, here