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Performance Bond

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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).

A Performance Bond ensures that a contractor will complete their work according to the terms of the contract. The terms and conditions provide for when the project will be built (and to what standards), and at what price. The bond further protects the owner from a default on the part of the contractor due to a delay in construction or construction work that is substandard.

What is a Performance Bond in Construction?

Construction is the primary industry that uses performance bonds. A performance bond in construction simply guarantees that the construction project will be built according to the price and terms of the contract. While performance bonds can be written for a almost any industry including security, technology, transportation and others, construction contracts are the primary user of performance bonds.
performance bonds infographic

How Do Performance Bonds Work?

A chart showing the principal, surety and obligee on a performance bond and the responsibilities of each party.
Principal
The Principal is the party needing the performance bond. The principal is typically a general contractor or subcontractor. The principal is responsible for completing the contract at the agreed price and terms of the contract.
Obligee
The Obligee is the party requiring the performance bond. The obligee is usually the project owner, or general contractor. The obligee is the party benefitting from the performance bond's guarantee. The performance bond guarantees that the obligee will have their contract completed according to the price and terms of the contract.
Surety
The surety is the bond company. The surety is a financial institution that is guaranteeing that the principal contractor will complete the work according to the price and the contract. The surety backs the performance bonds with a financial guarantee if the contractor defaults. The surety bond company is often an insurance company.

What Do Performance Bonds Cost?

Performance Bonds Cost between 0.5% – 3% of the contract amount. In our experience, most contractors will pay between 1% – 2% of the contract amount. The price of a performance bond depends on several factors including the credit and financial strength of the customer and the type of work being bonded. Other factors such as the length of the contract and warranty period may also add the cost.

Performance Bond Cost? Banner shows the cost of the bond with a colored dark blue, dollar money, and calculator as background.

Who Pays for a Performance Bond?

The principal contractor is always responsible for paying for a performance bond. However, most contractor charge this back to the obligee or project owners as a job cost. This varies by obligee. Some obligees ask for the bond cost and reimburse it directly. Others will put a certain percentage in the jobs such as 1.5%. However, some obligees make no direct inquiry into the cost and the contractor is expected to read the specs before bidding and include the cost in the bid, along with other job costs.

How Do You Get a Performance Bond?

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We Run Credit

We run a simple personal credit check.

Payment

Pay the premium and we issue the performance bond!

Submit An Application

Complete an online application or print and email one to us.

The Contract

Send us the contract or purchase order needing a performance bond.

Performance Bonds of $750,000 and less can be approved with a simple credit check. Simply complete the online application or download and complete the form. Our surety experts will contact you ASAP to get your bond approved.

For larger performance bonds, an application, personal financial statement and often company financial statements may be required. Swiftbonds represents many of the nation's leading bond companies to get contractors the approval they need at the best terms possible. We have helped thousands of contractors nationwide get performance bonds. Contact us to learn why we are one of the nation's leading performance bond companies!

Why Do I Need a Performance Bond?

Performance Bonds are required on Federal project with a contract value of $150,000 or more under the Miller Act. Many states and municipalities have similar requiremens called “Little Miller Acts.” However, performance bonds can be required any time by project owners, developers, lenders and other contractors as a way to protect a project against the risk of default or price escalations.

What is Performance Bond and Payment Bond?

Performance Bonds are often written together with Payment Bonds. However, these are two different types of surety bonds and guarantees. While a performance bond guarantees the completion of a contract for a set price, a payment bond guarantees that certain subcontractors and material suppliers will be paid for their work. Payment bonds are necessary on public projects because subcontractors and suppliers do not have mechanic's lien rights. However, payment bonds are often used on private projects as well to ensure that they remain lien free. 

When a performance bond is written together with a payment bond, there is only one cost for both bonds. In our experience, it is very common for both bonds to be required together. The obligee really gets 200% coverage for their project for the price of 1 bond because the performance bond normally covers 100% of the contract amount, while the payment bond also covers 100% of the contract amount. 

This chart compares performance bonds to payment bonds. An image of construction hardhats in thebackground.

Are Performance Bonds Insurance?

This chart compares performance bonds to insurance. It has an image of an insurance policy and an image of a performance bond in the background.

It is easy to mistake performance bonds for insurance. In fact, many insurance companies write performance bonds. However, performance bonds are not insurance. They are a type of surety bond called a “Contract Surety Bond.” Performance bonds are actually a three-party agreement between. The principal on the bond purchases the performance bond for the benefit of a third-party, which is the obligee. Insurance is a two-party agreement. The insured purchases insurance for the benefit of themselves. See here for our California Performance Bonds.

A second major difference is what happens in a claim. Performance bonds require the principal to indemnify the bond company if  a loss occurs. This means that the principal not only pays the premium, they are also financially responsible for losses. Alternatively, an insured buys an insurance policy and then transfers most of the risk to the insurance company. The insured may be responsible for a deductible, but the insurance company is financially responsible for any remaining loss. In this way, performance bonds are more closely related to a credit than to insurance. See here for the definition of a performance bond.

Differences Between Performance Bonds and Bank Letters of Credit

Cost - 0.5% - 3%.

Generally, not collateralized.

Does not restrict other borrowing.

Requires defense of claims.

Cost - Tied to interest rates. 1% - 5%.

Cash or hard collateral often required.

Borrowing is usually reduced by LOC amount.

Taken with no defense if a claim occurs.

Performance Bonds are different from bank letters of credit. Performance bonds are generally considered unsecured credit, because the bond company does not typically file a lien against the contractor's assets unless a claim occurs. This means that the contractor can use the assets for other purposes such as loans and borrowing. Alternatively, bank lines of credit are often collateralized.

Another advantage of performance bonds is cost. Performance bonds are not directly influenced by interest rates. Their cost tends to be more stable. Letters of credit are often tied to a benchmark rate and can fluctuate with the overall economy.

If a claim does occur, performance bonds require that a claims professional investigate the claim before paying. Bank letters of credit have no such protection. The line of credit is generally paid on demand and it would be up to the contractor to try and recover through legal means.

Performance Bond Frequently Asked Questions

What is a Performance Bond in Construction?
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When Are Performance Bond Released?
Performance Bonds are not returned at the end of a project. The guarantee remains in place until the project is complete, and any maintenance period is finished. However, it is common for the Obligee to send the surety a “Consent to Final Payment” when the project is over.
Are Performance Bonds Refundable?
Generally, no. Performance Bonds guarantee a contract so once they are in place, they are not refundable. They can be refunded in some cases when work has not started and all original bonds are returned to the surety.
What is a 100 Performance and Payment Bond?
Performance Bonds and Payment Bonds are generally written for 100% of the contract amount. A 100 Performance and Payment Bond requirement means that the contract requires a 100% Performance Bond AND a 100% Payment Bond. This is standard for most bonded contracts.
What Happens if a Claim is Filed on a Performance Bond?
The surety bond company is required to investigate performance bond claims. If the claim is found to be valid, the bond company will either complete the project or pay the obligee. The surety company can then seek reimbursement from the principal contractor under the indemnity agreement.
What Happens if a Performance Bond in Called?
When a performance bond is called, the surety pays any amounts due to protect the Obligee. If there ever comes a time where an agreement can't be fulfilled, it's up to you who steps in first: your principal or your guarantor.
How Long Does it Take to Get a Performance Bond?
It takes 24-72 hours to complete the performance bond process. This is a major factor in turnaround time so it's important that you make sure of this beforehand!
How Do You Collect on a Performance Bond?
The process is fairly simple, just contact your bank or brokerage house to request a wire transfer of the money owed. You will likely need some sort of proof that you are authorized representatives before they can comply with this order. Get a Idaho Performance Bonds.
What is a Bonding Rate?
Contract bonds are a type of loan that connects the lender with the contractor. Contract bond rates depend on many factors, including financial stability and experience as well as size of contract given to contractors. For example, if contractors qualify for up to $500K in contracts then their rate would be 3%.
What Are the Three Types of Construction Bonds?
Three types of construction security bonds are bid bonds, performance, and payment surety bonds. These all have to do with how they will be paid for during the course of building a project such as schools or houses.
What Happens if Performance Bond Expires?
Expiration dates are a thing of the past. Performance bonds can expire as well, but unlike contracts they will not change anything about what happens to them when that date arrives. The bond is only valid for the duration of your contract and it's time-sensitive so don't waste any more valuable hours on this issue!
What is a Warranty Bond?
When a construction project is completed, it's important to check for faults and defects. A warranty bond can protect against workmanship errors by covering the cost of any necessary repairs during the specified time period.

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