Performance Bonds

Performance bonds are surety bonds issued by surety companies to guarantee satisfactory completion or performance of projects by contractors. These are generally three party agreements:

• Principal - A contractor hired to perform under a specific contractual agreement
• Obligee - The party for whom the bond will benefit if there is a contractual default. 
• Surety - The guarantor, who is generally an insurance company.

A General Contractor (or Principal) may be required to provide a performance bond in favor of a project Owner (or Obligee) in order to secure award of a contract. If the contractor fails to perform their duties under the terms of the contract, the Obligee may choose to call upon the Surety Company to fix the problem or make payment out of the bond. These payments are for damages up to the limit of the performance bond amount.

In the same way Sub-Contractors may be required to provide a performance bonds in favor of a General Contractor in order to obtain a subcontract. If the subcontractor fails to perform required duties under the subcontract specifications, then the Obligee may call upon the Surety to cure the problem or make payment(s) out of the bond. These payments are for damages up to the limit of the subcontract performance bond. When subcontractors provide performance bonds to general contractors it is also sometimes called “bonding back”.

As with any surety bond, if there is a default which results in loss by the surety company, the surety will expect the principal to repay any amount paid out by the surety following the claim. Remember, BONDS ARE NOT INSURANCE…

There are multiple factors that are taken into account in determining pricing of a performance bond, such as, but not limited to, the amount, contract type, state in which it is written, the Surety Company’s filed rates, the principal’s credit and financial standing, previous job history (of the contractor), current projects the contractor is working on (work on hand), as well as other underwriting factors. A portion of the cost can also come from any applicable fees charged by the agent or broker in certain cases.

Feel free to let our contract bond department help with any inquires you may have on a performance bond or any other type of contract bond. We can usually provide and basic idea of the cost as well as other requirements before clients complete any forms. This provides the ability to save the client time and trouble in the bonding process while hopefully opening up a new and profitable relationship between both the contractor and the surety. Contact us today for more information on performance bonds and other related contract bonds.