You can now apply online for a Performance Bond – it only takes three (3) minutes! (Yep, we timed it.) Click here:
- Complete the form and email to [email protected]
- Be sure to include the Contract and Notice of Award letter (bid specs from the obligee).
- Send the bid results if you have them
What Is a Performance Bond?
The performance bond acts as a guarantee that the contractor will complete all obligations specified in their contract. Performance bonds are often used as guarantees for contractors to complete designated projects.
Key Details of a Performance Bond
Performance bond Surety companies offer this form of security so that if a contractor fails, the owner of the project will be either:
- compensated financially; or
- have another company come out and finish the work per the terms of the contract.
- Surety Companies are typically branches of a large insurance company.
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, which we value greatly, 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 rely on the strength of 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.
What are Performance Bonds Used For?
When the owner of a project wants to be sure that their investment is protected, they require a performance bond from the general contractor that is working on the project. That’s because if the general contractor cannot complete the project on time, or per the specifications in the contract, then the owner can go the surety to be made whole
What the owner will do is make a claim on the bond. The surety (the entity that guaranteed the work of the general contractor) will review the claim. If valid, they will either pay damages or get someone else to finish the work.
Surety Bond issuers determine the price of the bond based on three main criteria:
- Bond Amount
- Type of Bond
- Contractor’s risk profile (which can be credit based, or a full financial review)
The price of many contract performance bonds is between One and Three Percent (1-3%). If the rate is three percent and you were awarded a $250,000 job, then the price of the bond would be $7,500.
How Does a Performance Bond Work?
A question that we frequently get is “How does a performance bond work?” A performance bond is a three-party contract. The parties are:
- The Principal (also known as the Obligor). The Principal is the contractor on the job or the person that is doing the work.
- The Obligee (owner). The Obligee is the party that gets the benefit of the bond. If the contractor doesn’t do their job, then the Obligee can look to the surety to make them whole.
- The Surety. This is the entity that is guaranteeing that the Principal will live up to the terms of the contract and, if not, make the Obligee whole. The surety is usually a large insurance company.
These bonds come with guarantees from a third-party guarantor instead of the construction contractor. A performance bond can be defined as a guarantee to the project owner that the contractor working on the project will meet obligations to complete within the agreed deadlines and according to the conditions that have been set by the contract.
Even though these types of bonds are mostly used to guarantee construction projects, they can also be used for supply and service contract jobs depending on the agreements.
When Do You Need a Performance Bond?
Many times, a performance bond is required by law for governmental construction projects (see the Miller Act below), and you will often see them paired with bid bonds. Private construction projects traditionally did not use performance bonds, but we see many projects where these are now being required.
Understanding Performance Bonds – A bit of History
Bonds are typically used in the construction and real estate industries. Bonds became widely used in the construction industry due to the passage of the Miller Act.
The Miller Act was passed in1932 to ensure that public works contracts that exceeded $100,000 could not be executed without the use of performance bonds. Many states and local municipalities have passed similar laws, knows as Little Miller Acts, that require a performance and labor & material bond on all state funded construction projects.
Performance Bonds versus Insurance
A performance surety bond is not insurance. Insurance protects against a general loss while performance bonds are specific to a contract. Further, bonds are written on a no-loss assumed basis, which keeps the premium down. If they were priced like insurance, then the cost would be prohibitively expensive (around 10-15% per job).
What are the Pros and Cons of Performance Bonds?
A performance bond can be beneficial to the obligee because
- it ensures that work will still get completed even if the principal doesn't or cannot pay their subs or material vendors
- the work will get completed on time
- the work gets finished according to the specifications in the contract
- the budget is fixed as costs are not passed on to the owner
The drawbacks of a bond include:
- The surety may try to claim that the obligee did not comply with all of their terms and conditions in order avoid paying some or all money owed on a performance bond
- The surety might try to get the obligee settle on a lesser amount or less expensive remedy in order for them not have pay out all of their damages. One way this could happen would be if there are terms within your performance bond that allow certain amounts and/or disbursements from being reimbursed by others depending upon what happens with regard towards performance under said contract; these mechanisms give either party incentives not just when everything goes well but also during times where things go awry so long as both parties agree to the resolution
- The obligee must quantify the losses and, if they are wrong, may not be able to recover all of them
How to Apply for Your Performance Bond Today
In order to qualify for a performance bond, you’ll need to apply for it. The whole process of qualifying is referred to as underwriting. There are several documents that will be needed for the underwriter to approve your application. Some of the information that will be required for the review of your business will include:
- Yearly business statements (P&Ls and Balance Sheets) that have been validated by an accountant
- Reference letter from the bank
- Perosonal Financial Statements for the owner of the business
- Accounts Payables and Accounts Receivable aging reports
- There will be a requirement of submitting all the necessary financial information even if it is a small business for the performance bondsto be approved. It is recommended that the applicant is working with a CPA that is familiar with the bond application process if you’re in the construction industry.
Can I get one with bad credit?
Yes, you can get a bond with bad credit. It does make the process more difficult. Sometimes, it also requires the surety to add additional conditions to the bond, such as escrow or collateral.
What is the difference between a Performance and a Payment 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 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?
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 compensation 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 is a valid claim and, more importantly, the surety will ask the contractor to indemnify it for any claim damages and lawsuit fees.
What about a sample bond form?
We have more information on collateral on our Contract Bonds page.
What is a 100% performance bond?
A 100% performance bond provides you with the peace of mind that if your contractor fails to complete a project, they will be legally obligated to pay for any additional costs needed. The contract value is also available in case subcontractors and suppliers are not paid on time.
What is a 50% performance bond?
A performance bond is a financial guarantee that ensures the owner of the project will be compensated should their contractor fail to complete. The amount varies depending on what percentage level it's based on, but typically 50% or 100%.
What is a 10% performance bond?
A 10% performance bond is typically set at the beginning of a contract to ensure that you are paid in case your service provider does not perform. These bonds can also protect against having to find someone new just because one company didn’t complete their work on time or for other reasons.
Can I Apply online?
Of course! What do you think we are, chopped liver?
This is continued on our Contract Bond page, here