Breaking Down Contract Surety Bonds: What is a Performance Bond?

A variety of construction bond is the performance bond. This type of surety bond guarantees that a project will be completed satisfactorily by the contractor who undertakes it. This is different than insurance; the surety doesn’t just pay when contractors default on work.

Three parties are involved with any given performance bond: the contractor or principal, the customer or obligee, and the surety company who guarantees the contractor will come through on the job. If they fail in this duty, the customer can make a claim on the bond and the surety company will pay—and then seek reimbursement from the contractor who didn’t live up to their end of the bargain.

Why Are Performance Bonds Needed?

Before most construction jobs can begin, performance bonds are required. In fact, typically before a contract for a construction project is ever awarded, the winner will have submitted a bid bond—and part of that process for a contractor agrees to secure a performance bond.

For all construction projects worth $100,000 and above that are paid for with federal money, the Federal Miller Act requires performance bonds. Most private developers require performance bonds, too. In fact, general contractors frequently insist that their subcontractors carry performance bonds; this is called “bonding back.”

Performance Bond Versus Payment Bond: What’s the Difference?

A performance bond goes together with a payment bond, although they are not the same thing, and both are usually required on construction jobs. A payment bond guarantees that a contractor pays all subcontractors, laborers, suppliers, and anyone else who works on a particular project. This ensures that the construction project is completed without any labor or supply payment issues holding it up.

On the other hand, a performance bond guarantees that the project itself will be completed, and to specifications. The performance bond protects the party who is expecting the work to be finished—say, the city or a private customer—and ensures they won’t incur financial losses from projects that don’t get finished as planned. This kind of bond comes into play not only when a project isn’t completed, but also when it turns out that the contractor can’t finish according to agreed specifications; in that situation, the customer is compensated with money for any damages or losses from that difference in the outcome and the expectations.

The payment and performance guarantees are very closely connected. Both a performance bond and a payment bond are often required for construction projects—and it’s also probably why they are sometimes confused.

How Much Will a Performance Bond Cost?

Luckily, surety companies often package performance and payment bonds together, so contractors can pay a single rate and go through the process once. The amount of a performance bond is determined by the dollar value of the work to be performed.

The cost of a performance bond is typically a small fraction of the entire amount of the job contract, usually between 1 and 5 percent. A strongly qualified contractor might receive lower quotes than a contractor with financial and credit challenges. For the best performance bond suited to your contract and your financial situation, contact Viking Bond Service, Inc. Our professional team will always offer the best option at the lowest rate possible.