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.
A performance bond can be defined as a guarantee to the project owner that the contractor working on the project will complete within the agreed deadlines and according to the conditions that have been set by the contract. The main function of a performance bond is to provide protection for the person that has commissioned the project in the event that a contractor fails to honor the agreement.
Even though performance bonds are mostly used to guarantee construction projects, they can also be used for supply and service contracts depending on the agreements.
Getting a Performance Bond
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 will be a lot of processes and documents that will be needed for the performance underwriter to approve your application. Some of the information that will be required for the review of your business will include:
- Yearly business statements that have been validated by an accountant
- Reference letter from the bank
- Financial Statements for the main shareholders of the business
- Payables and receivable
There will be a requirement of submitting all the necessary financial information even if it is a small business for the performance bonds to be approved. It is recommended that you’re working with a CPA that is familiar with the bond application process if you’re in the construction industry.
Do You Need a Surety Bond Broker?
The broker will be the direct line of communication between your company and the bond provider. Their main role is to ensure that you’re gathering all the necessary information so that your performance bond is approved. They will start by looking at the financial statements and identify the areas that could limit the chances of qualifying for the bond. Once they’ve reviewed the information, they’ll prepare for the submission to the bond company. Since they have the experience of working with Bond Company, they’ll help with the rate negotiation as they understand the market requirements for a business that is similar to yours.
One Time Performance Bonds
There are companies that are not in the construction industry but might need a performance bond for a particular project. The marketplace has made it easier to access one-time performance bonds. The information that is required is not simpler and the performance bond cost is also easy to determine. This is a big departure from the past given how complex and arduous the process used to be regardless of the size of the bond.
There is no denying that construction is a risky business. That is why insurance corporations have to be involved in the project. The bond premiums will vary from one premium to another. It could be a performance bond nationwide when there are a couple of projects involved. The service broker that you’ll be working with should take care of every detail so that you’re getting the best rates for the performance bond. Surety companies will try as much as possible to have indemnity.
What is a performance bond used for?
A performance bond will be issued to one party in a contract agreement to provide a guarantee in the event the other party is unable to meet the contract requirements. In most instances, the performance bond will be issued with an insurance company or a bank.
How does a performance and payment bond work?
A performance bond is issued to provide an assurance from the contractor that the work will be completed with the stipulated time frames, prices, and in accordance with the terms and conditions. The purpose of the Payment Bond is to protect material suppliers, subcontractors, and some laborers against nonpayment.
What type of bond is a performance bond?
A Performance Bond can be defined as a surety bond that provides a financial guarantee that all payments will be made and is usually issued by an insurance company. The insurance company will back the completion of the project by a specified contractor.
This is continued on our Contract Bond page, here