A performance bond provides a kind of guarantee that a construction project will be satisfactory completed, and that a contractor will live up to all the terms specified in the performance bond, to the satisfaction of the project owner. The company which sells a performance bond to a contractor is known as the surety company, and as collateral for backing the bond financially, the surety company will often require some form of property or equipment.
This is in the event that a claim is made against the performance bond by the property owner, if the contractor should not live up to the terms of the bond. Surety companies can be either financial institutions such as banks, or they can be insurance companies which make bonds available to contractors who apply for them, as a requirement of bidding on a construction contract.
How Does a Performance Bond Work?
Both the government and private sector companies require performance bonds as protection against noncompliance, or failure to complete a project by contractor. In the case of federal construction projects, these projects often involve the building of bridges, roads, and other structures which will be made available to the public. When the contracting company fails to live up to its obligations on the project, and for whatever reason, cannot complete the specified body of work, the bonding company may be obliged to pay for the completion of the project, or secure the services of an alternative contracting company for the completion of the detailed project.
The performance bond itself will include terms that the contractor must live up to, and which constitute the project owner’s evaluation of what constitutes a complete project. If the contractor fails to meet any of these terms, the construction job owner would then have the option of making a claim against the bond, to recover any losses which might of been incurred.
If it turns out that the contractor would be bankrupted by having to pay the amount of any claim against him/her, that would leave the surety company as the sole responsible party for making up any losses to the project owner. Because there’s so much at stake in this type of bond, the terms and the language used must be very specific, because as often as not, a case like this can go to court, where the terms of the performance surety bond are subject to legal interpretation.
When a Construction Bond Obligation is not Met
When the terms of a performance bond are not entirely fulfilled by a contractor, the project owner is within his/her rights to make a claim against the performance bond to recover any losses which may have resulted. Initially, the surety company is responsible for paying that amount to the project’s owner, assuming that the claim can be validated, either privately or through legal means.
In many cases however, the bonding company would then have the option to pursue the contractor to recover that same amount of money, since it was the contractor’s failure to comply that caused the claim to be made in the first place. It will depend on whether or not language is included in the performance bond, that a bonding company has this option to pursue the defaulting contractor.
When that language is written into the performance bond, and the bonding company requires a contractor to repay the amount of a claim, a contractor is legally obliged to do so. In the event that paying that claim would push the contractor into a state of bankruptcy, the bond issuing company would then have no recourse for being compensated for its losses, and would then have to absorb any financial setback. For this reason, surety companies make a point of thoroughly screening applications from contractors who are interested in purchasing this kind of bond.
Performance Bonds Cost
Almost every contractor who successfully bids on a construction project will have a performance surety bond in hand, simply because a project owner will require that kind of assurance that the job will be completed. As a general rule of thumb, a contractor can anticipate that a surety company will impose a charge of roughly 1% of the total contract value as a cost of a bond itself.
There are special cases however, such as when the value of a contract exceeds $1 million, and in those situations, the cost of a performance bond might actually climb as high as 2%. In all cases though, the cost imposed on purchase of a bond will be closely connected to the credit-worthiness of the contractor himself.
Contractors who appear to be relatively unstable financially will of course be charged a higher amount for a bond than would a financially stable contractor with a good credit history. As another rule of thumb, purchase of a performance surety bond by a contractor is generally made in conjunction with the purchase of a payment bond, so that the terms of both can be included under one comprehensive coverage.
How to get a Performance Bond
Obtaining a surety bond is a relatively easy process, assuming that you as the contractor, do not have a bad head credit history, or are considered financially unstable, so that a bond issuing company would be reluctant to take a chance on you. For credit-worthy applicants, the process is fairly simple, beginning with selection of a reputable bond issuing company such as NFP Surety. NFP Surety is the largest and most reputable provider of performance surety bonds in this country, and is the first choice of a vast number of contractors in the construction business.
After having selected your surety company, you can go online and apply right at the website of your chosen provider. Your application will be reviewed, and more than likely, a comprehensive check into your credit history and financial condition will be undertaken by the bond issuing company, in order to protect themselves against loss.
Assuming that your application is approved, an indemnity document will be sent to you, which you must then sign in the presence of a public official like a notary, and then return the indemnity agreement with the application fee. Upon receipt of your indemnity agreement plus fee, the bonding company will then issue a bond to your contracting company, and the conditions of a bond will be in effect from that time forward.
Let us help you get bonded today. Contact our office, and we can get you bonded and have your bond mailed (or in some cases) emailed to you immediately. NFP Surety for all you bond needs!