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What is a Performance Bond on a Construction Project?

A performance bond is a guarantee for satisfactory completion of construction projects. It protects the insured party should an entity fail to meet their obligations as set out. The performance bond ensures that all persons and companies involved with the project are held accountable, including contractors, subcontractors, material suppliers, designers and architects (if applicable).

Construction projects are expensive

A performance bond is a type of insurance that protects the owner from loss in case the contractor fails to complete their work on time and within budget.

If you're considering hiring a contractor for your next construction project, it's important to know what protections are available should anything go wrong.

How does a performance bond work in construction?

The performance bonds protect the owner from contractor default in the middle of a project and then having to pay someone else more to come in and complete it.

Who pays for a performance bond?

A performance bond would have to be paid for by the party providing services under an agreement. It's common in industries like construction and real estate development, but they're not typically necessary unless you sign a contract that requires one.

How much does a construction performance bond cost?

It's hard to say exactly what the cost of a construction performance bond will be because it usually is less than 1% of the contract price but in some cases, they may run between 1-2%. That being said, labor and material payment bonds are companions to these.

What are the three major types of construction bonds?

Construction companies have three major types of bonds: bid bonds, performance bonds and payment bonds. Here's a What happens if you Sign a Contract before you can get a Performance Bond?

What is a 50% performance bond?

A performance bond is a guarantee that the contractor will complete the project with no defaults. The amount of this guarantee can be 50% or 100%.

Is it hard to get a performance bond?

It can take weeks to get a performance bond. You'll need an excellent credit score and in some cases, money for the bond that is payable upfront. Luckily though, you don't have to worry about this too much because it's not as difficult of a process as one might think!

Do you get your money back on a performance bond?

It can be difficult to determine what is best for the future. There are many factors that come into play, such as how much work there will still potentially be and if it was worth purchasing in the first place.

How do you collect on a performance bond? 

Collect the funds owed from the bank or brokerage house holding it. You may get a cashier's check, request wire transfer into an account of your designation. Read this What is a Performance Bond and Labor and Material Payment Bond?

How long does a performance bond last?

Performance bonds are typically renewed every 12 months, but in some cases they can last up to 36 months. If you want a lower rate after it's been two years since your purchase date, all you need to do is call and ask for one!

What is the difference between a surety bond and performance bond?

Surety bonds and performance bonds are two different types of business agreements that help define the contract between an owner who hires a contractor for work. In general, surety bond is used to describe all such instruments while "performance bond" refers to a specific type of surety agreement.

What is the difference between a bid bond and a performance bond?

The primary difference is what they cover. Bid Bonds are used to help select which contractor will get the project while Performance Bonds are there for when it comes time to make sure that your work gets done right!

What is the purpose of a performance bond?

The Performance Bond secures the contractor's promise to perform the contract in accordance with its terms and conditions, at the agreed upon price, and within the time allowed. See a What is a Performance and Payment Bond and how does it Protect the Owner?

What happens when a performance bond is called?

A performance bond ensures the obligee is protected in case of a principal default. If an obligee claims that the contract has been breached and terminates it, he or she can call on the surety to meet their obligations under this bond.

When can you release a performance bond?

A performance bond is not released until the project has been completed and any defects have been resolved. View our What is a good Performance Bond rate?

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