Performance & Payment Bond Guide
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What is a Performance Bond?
Performance Bond Definition: Performance bonds are guarantees by a bonding company that jobs will be completed per the specifications of the contract. This is different than insurance, as the bonding company will not simply write a check if you default on the job. If you’re unable to complete the job, the bonding company may put the job out to bid with select contractors or even complete the work themselves.
Performance bond requirements are set in place by the Miller Act for all public work contracts $100,000 and above. Bonds may also be required for private work or by a general contractor requiring it of their sub-contractors.
If claims are filed on your performance surety bond, you are responsible to pay back the bonding company. Learn more about how surety bonds work and why having a full understanding of them can mitigate your risk.
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. 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 the bonds. If a contract requires a bid bond, a payment and performance surety bond will usually be required after. Learn the entire 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 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.
That's not a problem, you can apply and get a standalone payment bond approval, as the same application and process is used for standalone payment bonds.
No. Only one application is needed when applying for both bonds.
How Much Does a Performance Bond Cost?
The cost of a performance bond is a small percentage of the full contract amount. Larger contract premiums are usually around 1%. Smaller contracts have fewer underwriting requirements, but are priced higher at around 3%. The percentage you must pay is also known as your rate. We have more in depth information if you want to learn how your performance bond rates are determined. Your performance and payment bond cost should be included in your bid, making it so you do not pay for your bond, the owner does. If you want to see if you qualify and determine your payment and performance bond cost, you need to fill out our application to get an online performance bond quote.
Construction Performance Bond
Performance bonds are most commonly used to guarantee construction contracts. The bonding companies are most familiar with underwriting for the construction industry, as the majority of public construction work must be bonded. Take a look at our guide to learn more about performance bonds for construction and how to get them.
Performance Bond vs Payment Bond: What is a Payment Bond?
Payment Bond Definition: A payment bond is a guarantee that you will pay all sub-contractors, suppliers and laborers working on the project.
As mentioned above, a performance bond is different as it ensures the job will be completed properly. These two guarantees go hand in hand in terms of successfully completing a project, which is why both are usually required. While it is rare, payment bonds can be required without the need for a performance bond.
Do You Need Both a Payment & Performance Bond?
Now that we’ve defined both performance and payment bonds, you might be asking:
“What is a payment and performance bond when lumped together and do you need both?”
The guarantee of your performance and payment are so intertwined that a performance bond and payment bond are almost always both required. Fortunately, bonding companies typically package a performance and payment bond together so you will only pay one rate for both. You can think of it as paying for the performance bond and getting the payment bond for free.
Stand-alone performance or payment bond requirements do occur at times, but they are a rarity. Should you be required to post just one of the two, the same rate typically applies as it would for both bonds bundled together.
How to Get a Performance Bond
If you need payment and performance bonds for a job, you’ll need to apply to see if you qualify for bonding. Keep in mind there are items that are required if you want to get approved for construction 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 you’re applying for bonding, you’ll want to ensure your financial statements include what’s needed to give yourself the best chance of getting approved. Although not required, it’s strongly recommended you work with a CPA well versed in construction, as they know how to present your business properly to get bonded. Lastly, it’s possible to a get performance bond for construction using your tax returns, but doing so is not recommended if you want to work on larger projects.
Where Do You Get a Performance Bond Form?
For your convenience, our company has all of the most common bond forms on file. However, if the obligee has its own specific form and performance bond language, you’ll need to get the performance and payment bond form from them and supply it to your bond agent at the time of the request.
A bond form is a template of legal language used to make the bond guarantee, and the owner of the job decides which bond form must be used. The bond form language will include the language “faithful performance” or something similar, which simply means that you will complete the job properly. The payment bond form language guarantees the payment of all sub-contractors and suppliers.
Performance & Payment Bond Claims Will Cost You
Some mistakenly refer to their bond as performance bond insurance. However, a performance bond is not insurance for you, but for the owner. You are responsible to pay bond claims in full, which can be as large as the full bond amount (including legal costs), and performance bond providers should be your first line of defense against them. The indemnity agreement you must sign to get your 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 companies 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 company it should be a big red flag to reconsider doing business with them.
Good Performance Bond Companies Save You Money
It’s important that you do your due diligence when choosing a bond agent for performance bonding. It’s the agent’s job to pair you with a bonding company that not only meets the financial requirements of the owner and your capacity needs, but also provides top notch claim support. Since you’re ultimately responsible to reimburse the bonding company for any paid claims, it’s imperative to work with an agency that that can assist in claim mitigation or resolution.
For example, a bid bond guarantees that a performance bond will be provided if you are awarded the contract. However, if the bid spread (the difference between your bid amount and other bidding contractors) is large, the bonding company may refuse to write the performance bond, which can lead to a claim on the bid bond. In this scenario, the cause of the claim is out of your control and you must rely on your agent to assist in addressing the situation. This emphasizes why choosing your bonding professional wisely is so important and how a good relationship with the agent and the surety is imperative.
Bid Bonds & Performance Bonds Work Hand in Hand
Your bond line can be thought of as your surety credit line that you are pre-approved to use. You will be provided a single bond limit for individual jobs and an aggregate bond limit, which is the total of all active bonds.
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 for the contract if you’re awarded a job.
Bid bonds count against your bond line until you notify your agent that you were not awarded the job. Performance bonds count against your bond line until the job is successfully completed. For more information, read our in-depth guide about how bid and performance bonds work together.
Bad Credit Performance Bonds
It’s possible to get a contract 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. Credit issues are a red flag for the underwriter on your previous history of payments, and viewed as a higher likelihood of default on the contract or an inability to pay sub-contractors and suppliers.
Contractor Performance Bond Alternatives
If you don’t want to post contractor performance bonds for jobs, you may have the option of posting cash collateral in the full amount of the bond that’s being required (this is sometimes incorrectly referred to as a “cash performance bond”). Typically, an owner will not accept cash directly, but may allow your bank to issue an irrevocable letter of credit from your bank. However, posting collateral will greatly restrict your company’s cash position, and as you likely know readily available cash is essential to a contracting business. If you think getting a performance and payment bond is the right choice for you, read our contractor’s bond guide where you’ll find every bond you need for performing contracting work.
Performance Bonds for Service Contracts
Performance bonds are sometimes needed for contracts unrelated to construction, such as janitorial or school bus contracts (these also 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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