What is a Performance Bond?
A performance bond is a guarantee from a bonding company that jobs will be completed per the specifications of the contract.
Why Are Performance Bonds Necessary?
Performance bonds are needed to ensure a construction project is completed, even if the contractor is unable to deliver. Without them, the owner would have to support the additional costs of seeing the project through by itself.
How Does a Performance Bond Work?
A bond 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.
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.
When is a Performance Bond Required?
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.
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. You’ll need to provide your financial statements, including the following:
- Balance sheet
- Income statement
- Cash flow statement
- Complete notes and disclosures
- Work schedules
For bigger contracts, you may also need additional information provided by your CPA
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%.
What’s the Difference Between a Performance Bond and a Payment Bond?
A payment bond is a guarantee that you will pay all sub-contractors, suppliers and laborers working on the project. Aa performance bond is different as it ensures the job will be completed properly.
The guarantee of your performance and payment are so intertwined that a performance bond and payment bond are almost always both required.
The Beginner's Guide to Bidding and Winning Public Jobs
We created a comprehensive guide which explains everything you must know in order to bid on and win projects. The topics covered in the e-book include:
- The pros and cons of bidding on public construction projects
- Bid solicitation procedures
- What influences the bid process
- How to bid on public projects
- Surety bonds for bidding and construction
- Why you need to understand bond claims
All You Need To Know About Surety Bonds!
This e-book was created with to help contractors successfully navigate the process of bidding and winning public construction projects.
Frequently Asked Questions
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. Surety 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.
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.
No. Only one application is needed when applying for both bonds.
You must contact us immediately, as we have a team of claim specialists here to find a resolution for you. Keep in mind, it is crucial that you work with an expert in the surety industry. Learn more about how to ensure you choose the proper bond company.