Performance Bond Guide
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Why do you need a performance and payment bond?
You’re required to get bonds for projects (usually public jobs) you are awarded to protect the public. If you do not complete the project according to the contract, a claim can be filed which you’re responsible to pay. For example, if you walk off the job before the work is complete, a claim can be made. Learn more about how surety bonds work and how not having a full understanding of them can put your company at risk.
Costs are a percentage of the full contract amount. For smaller bonds, the percentage you must pay will be determined using your personal credit. However, costs for larger bonds are determined using personal credit, business financials and industry experience. Use our bond pricing tool to get a quick ballpark estimate or an exact quote.
It is possible if you are a smaller contractor. However, your credit issues cannot be severe, as approvals for smaller contractors are based solely on personal credit. Larger contractors with strong CPA prepared business financials and appropriate industry experience can get approved with credit issues.
No. Performance bond costs are based on the full contract amount, as the bond guarantees the total scope of work will be completed. Otherwise, there is no way to determine what portion of the contract is bonded.
After you are awarded a contract that requires a performance and payment bond. If a contract requires a bid bond, a payment and performance surety bond will usually be required after. Learn the entire contract bond process by visiting the construction bond guide.
Yes. However, you must have acceptable personal credit and you will be limited to smaller bonds. Apply to determine if your new business qualifies.
Your assets were joined upon marriage. With surety bonding, you are corporately and personally responsible for repayment of bond claims. Therefore, the surety requires your spouse to personally guarantee your company. In addition, if your spouse is unwilling to provide a personal guarantee, the surety will question why they should.
It is your pre-approved bond limits. Bond lines include single and aggregate limits. The single limit is the largest bond you can get for one particular job. The aggregate limit is the total amount of bonded work on hand you can have at once.
Hire a construction CPA. Your business financial statement is the primary item sureties will use to determine your bond line. If a CPA unfamiliar with construction accounting is used, your statements will likely be incorrectly prepared, limiting your chances to increase your bond line. The performance bond size you can get is based on in order of importance your business financial statements, industry experience, banking records, supplier references, personal credit and financial statements.
Working with a construction surety agent is also vital. Surety bonding is a highly specialized field and the experience of a standard P&C insurance agency may not meet your needs, unless they have dedicated surety experts. Skilled surety agents have direct access to the best markets, which means they can provide the lowest rates and the most support. They can also work directly with a CPA to ensure the contractor up for review is presented properly.
Yes. The obligee will have financial strength (A.M. Best Rating), federal and/or state licensing requirements the bonding company must meet. Using a surety company that doesn't meet the requirements will result in your bonds being rejected by the obligee. In the event of a surety financial strength downgrade, the obligee may request a replacement bond from a new surety at your expense.
No. There are non-construction and service contracts that can also require bonds such as school bus transportation or janitorial contracts.
That's not a problem, you can apply and get a standalone payment bond approval. The same application and process is used for both standalone payment bonds and combined payment and performance bonds.
No. Only one application is needed when applying for performance and payment bonds.
How to Calculate Performance Bond Costs
Pricing is a small percentage of the full contract amount, which is usually about 1-3%. The percentage you must pay (also known as your rate) is determined using your personal credit, financials, industry experience and even the type of work and where it’s being performed. However, if you include your performance bond costs in your bid specifications, you don’t have to pay for your bond.
Bond Claims Can Put Your Assets at Risk
You are responsible to pay bond claims in full, which can be as large as the full bond amount (including legal costs). The indemnity agreement you must sign to get your performance bond is a legal contract that pledges your corporate and personal assets in the event of bond claims. Watch our video for an easy to understand explanation of how bond claims work. Unfortunately, most bond agencies won’t take the time to explain how claims can put you at risk and how to avoid them; if this happens when working with a bond agent it should be a big red flag to reconsider doing business with them. Your bond agency should be your first line of defense against bond claims.
How to Avoid Bond Claims
Make sure you complete all projects according to the contract to avoid bond claims. As mentioned above, you are responsible to pay for any claims that you cause, which can be as high as the face value of your bond. If you need help understanding exactly what your bond guarantees you will and won’t do, please contact a bond professional.
Bid and Performance Bonds Work Hand in Hand
Bid bonds are the first thing you need to bid on public projects, as they guarantee the bids you submit are accurate and that the surety company will write your performance bond if you win the job. If you are awarded a job, you’ll need to get a performance bond. Find out what you’ll need in order to get bid and performance bonds.
Bad Credit Performance Bond Options
It’s possible to get a performance bond with bad credit, but it will depend on the size of the contract and severity of your credit issues. If you need a bond for a smaller contract, your credit issues can’t be severe if you want to get approved. Why? Credit issues are a negative reflection of how you handle your finances, and since you are responsible to pay bond claims can result in getting declined for a bond. It’s possible to get performance bonds for larger contracts with bad credit, but keep in mind you’ll need to provide the surety company with strong CPA prepared business financials and proof of adequate industry experience.
Tips for Getting Performance Bond Approvals
There are some items that are required if you want to get approved for performance bonds. When submitting your business financials to the surety company for a bond request, you must include a balance sheet, income statement, cash flow statement, complete notes/disclosures and work schedules. When your financial statements are being reviewed, you’ll want to ensure they show sufficient working capital, equity, cash flow and profit. Although not required, it’s strongly recommended you work with a construction CPA, as they know how to present your business properly to get you bonded. Lastly, it’s possible to get approved for performance bonds using your tax returns, but doing so is not recommended if you wanted to work on larger projects.
Performance Bonds for Service Contracts
Performance bonds are sometimes needed for contracts unrelated to construction, such as janitorial or school bus contracts. Just like other performance bonds, these bonds cost a percentage of the full contract amount. Learn more about how service contract performance bonds work and the process to get them.
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