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What is a Performance Bond?

What is a Performance Bond?

At Surety by NFP, our sole focus is to provide all types of bonds, Nationwide.  Performance bonds are a big part of what we do. Whenever you’re being hired as a contractor to do work, they can be highly beneficial, as it ensures that the contract owner will be protected in the event of a failed contract, whatever the cause of this failure. The following goes into much greater detail about the extent of this type of bond and how your company can benefit from one.  Visit our Performance Bond page to learn more.

Performance Bond Definition

Bonding requirements were created by the Miller Act for all public work contracts in 1935.  It was established for contracts $100,000 and above. Bonds can also be a prerequisite for private work or by a general contractor demanding it of their sub-contractors.  If claims are made on your bond, then, in accordance with the bond, you MUST pay back the bonding company.

performance bond definition

These are also commonly referred to as a surety bond, and performance security bond is basically a guarantee made by a surety company that jobs will be completed per contract guidelines and regulations. The primary difference between insurance and a performance surety is that a default on the bond doesn’t provide a contract owner with a simple check for their losses. If you as the contractor end up not being able to finish the job as it was contracted, the surety bond company, would either put the job out to be bid on by specific contractors or the rest of the work would be completed by the bond company directly.

This particular type of bond is required for any public work contract that reaches above $100,000 in order to protect the tax payer’s investment. While this bond is required for a public work contract, it can also be requested for any private contract or when a general contractor needs it for their sub-contractors. If any claim is filed by the contract owner on the bond, the contractor will be required to pay back the surety company that provided the bond. One of the most common examples of a contractor not being able to complete the contract they’ve signed is if they have to file bankruptcy and are unable to finish the job. In this case, the surety must compensate the contract owner for the losses.  Visit our dedicated contractor bond page to learn more.

Differences Between Performance and Payment Bonds

When getting ready to start a project, it’s oftentimes necessary for a contractor to purchase P bonds as well as a payment bond. While these two bonds are both essential towards the completion of a project, they do have slight differences that make it important to purchase both. For instance, a payment bond is a guarantee by you as the contractor that you will pay all of the suppliers, laborers, and sub-contractors that work with you on the project at hand. A Contractor bond ensures that the job is completed exactly as it was detailed in the contract.  Call us and we’ll give you a proper performance bond definition, today!What is a performance bond


The cost is a minor percentage of the entire contract amount. Bigger contract premiums are typically 1% (give or take). Contracts that are smaller have less underwriting requirements but inflict a higher price at approximately 3%.

Contact Surety by NFP today, and see if you qualify for a bond, and we will help determine all the involved costs.  We will make it easier for you, and if yo’re confused, we’ll better provide a performance bond definition.


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Documents Required When Requesting One

When it’s time to apply for a bond, you want to make certain that you have all of the necessary documents and paperwork to do so. While different surety companies have different requirements for accepting an application, there are some basic requirements shared by all of these companies. For instance, you’ll need to state the volume of the project and its degree of difficulty. We’ll ask for such information as:

  • A copy of a contract you’re being provided with
  • Info about any real estate you own, as this will typically hasten the process
  • Surety application
  • A minimum of two years of financial statements that have been prepared by a CPA

If you’re a smaller contractor that’s not taking on a massive project, it’s possible to apply for bonds (from a company like Travelers) without the use of financial statements, as larger bonds are reserved for contractors that are able to provide a selection of financial statements. In order to qualify for substantial performance sureties, it’s recommended that you provide the surety company with financial statements that include such items as:

  • Full notes and disclosures
  • Cash flow statement
  • Balance sheet
  • Income statement
  • Work schedules

They might require a few other things.

These items are often essential when you wish to be approved for the bond that you’ve requested, as the surety company wants to be certain that your financial statements demonstrate that your business has enough equity, working capital, profit, and cash flow. If these items are deemed sufficient by the surety company, you’ll be approved for the bond that you’ve applied for.

How long does it take to get one?  

Depending on size of the job, it can take anywhere from as little as a day to as long as a week, once we have required information.  For smaller bonds, let’s say $400,000 and below, we can often get the contractor approved and bonded, simply based on credit.  The quicker we can get the pivotal information from the contractor, ie- financial statements, copies of the contracts, and other info about the contractor, the quicker we can assist in getting them bonded.

Bad Credit – No Problem – we have programs for those with less than perfect credit.  It’s part of our poor credit surety bond program.  We’ll explore all your bonding options, and find a solution to your bonding needs!  Call us today, or fill out our online application.  Quotes are always free.

Importance of a CPA For a Bond

In order for you to apply for bonds with a surety company like ours, your financial documents will need to have been prepared by a CPA, or a certified public accountant. You’ll want to make sure that you only make use of an accountant that works within the construction industry. The CPA you select should be reputable and highly experienced so that you can be sure that your financial documents will be prepared properly. It’s also important to understand that different types of bonds require the usage of different types of accounting methods, which will be discussed in the following.

If you’re set to work on a larger contract that’s worth over $350,000, you should use the percentage of completion method, as this method is heavily preferred by the majority of surety companies. One of the more common accounting methods is the cash method. While this accounting method is the cheapest to have prepared, it only takes into account the cash you have in the bank, so your payables and receivables will be left out, limiting your access to larger P-bonds.

In the event that your contract is small or medium-sized, you might want to consider the accrual accounting method, which is easily the most basic type as it merely matches the expenses of the project with the expected profits of the project. The final type of accounting method to consider when applying for perf. bonds is a completed contract method, but this type should only be considered by smaller contractors.

The reason for this is because this method calls for reporting all income received from the contract while deducting any related project costs within the year during which the project was completed.  We have a dedicated page about construction completion bond.  It might help give you a clearer performance bond definition. 

Now that you’re aware of what performance bonds are, and how to apply for one, you can get started on the process. Call our professionals at NFP to take a look at all of your options. (800) 863-3210.  We’ll gladly lay out all costs, and guide you through the easy process.  We’ll provide you with a clear performance bond definition, so you can go forward and get bonded.  Companies of a sizes need to get bonded for their projects.  From as large as TPC, to a small mom and pop, proper bonding is extremely important.   


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NFP Surety has been working in the insurance industry since 2008.

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