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Performance Bonds

Performance Bond

How does someone ensure that the contractor or construction company they hire will perform according to expectations. Largely by requiring whoever they hire to have a performance bond. For anyone seeking work in the construction industry, it's important to understand how this common type of surety bond works and why it matters so much to your business. Viking Bond Service is here to break it down for you - and supply the performance bond your business needs as soon as you need them.

What is a Performance Bond?

According to data from the United States Census Bureau, more than 1.3 million new housing projects broke ground in August 2019. Whenever new construction starts — on residential, commercial, or government projects — there are countless contractors involved. In order to ensure that each of those contractors is meeting their contractual obligations, developers rely on performance bonds.

A performance bond is a type of surety bond that guarantees the completion of a project or satisfactory performance on a project by a contractor. If the contractor does not meet those standards, the company or individual they are working on behalf of can file a claim and recoup some or all of their investment.

Who Are The Parties Involved With a Performance Bond?

There are three parties involved with a Performance Bond:

  • The principal is the contractor who will perform the job. The principal must pay the upfront performance bond cost, pay to have the bond renewed, and pay to settle any claims filed against the bond.
  • The obligee is the party who hires the contractor to perform the job. They are the party who creates the surety bond requirement and also the one that benefits from any claims filed against the bond.
  • The surety writes the bond to guarantee that the contractor will fulfill their obligation. If the contractor does not, the surety company agrees to guarantee payment for any valid claims, up to the total surety bond amount. After that, the surety attempts to collect the total it has paid from the principal, the party who has the final financial responsibility.

When Do I Need a Performance Surety Bond?

Performance Bonds are required before beginning most construction projects. Usually, before being awarded the construction contract you will have already submitted a Bid Bond, which means that you've agreed to secure a Performance Bond in the event that you will be contracted to perform the job.

There are certain service contracts not related to construction that also require Performance Bonds, such as school bus contracts or janitorial services. In all cases, whenever performance bond requirements exist in a contract, it's important to begin the bonding process sooner rather than later. It doesn't take long - at least not once you've picked out the right surety agency to work with - but you can't finalize a contract (or get paid for performing any work) until you prove you have the necessary surety bond. Don't wait longer than necessary.

Why Do I Need a Performance Bond?

The Federal Miller Act requires Performance Bonds for all federally funded projects $100,000 and above. Private developers usually require Performance Bonds as well. General contractors often require these surety bonds from their subcontractors, which is called "bonding back." The reason is always the same: To help manage risk. For project owners, having a contract fail to meet contractual performance obligations - for completing a job on time, in budget, up to quality standards etc - could have very expensive consequences. Instead of bearing those expenses themselves and possibly jeopardizing the whole project, project owners write performance bond requirements into contracts so that the risk of poor performance shifts onto the contractor responsible for it.

Why Are Performance Bonds Important?

Construction projects involve a lot of risk. Minor delays and tiny defects can lead to massive costs for developers and construction companies. Performance bonds allow those who invest in real estate to insulate themselves from some of the risk. With performance bonds in place, the obligee knows that the principal will take financial responsibility for their mistakes. The principal knows this as well, creating a powerful incentive to meet the performance benchmarks set out by the obligee. Thanks to performance surety bonds, construction projects are more efficient and more economically viable for everyone involved.

Benefits for the Obligees:

Performance Bonds protect developers from losses. If the contractor fails to perform their obligation, the developer can make a claim on the bond to recoup money in order to pay another contractor to complete the project. As is the case with any surety bond, the surety will require the principal (contractor) to reimburse the surety for any money paid out to settle claims. Some obligees would also see that as a benefit - eg. the fact that contractors who fall short of expectations are held accountable for their broken promises.

Benefits for Principals

What is a performance bond good for from the principal's perspective? More than you might expect. It's true that contractors must shoulder the performance bond cost, but they receive significant benefits in return. Namely, they appear more trustworthy to developers who are looking for professionals they can depend on to meet expectations. Being willing to obtain the necessary bonds can attract more business over the long term. Plus, performance bonds help to keep the industry accountable, which helps to keep it sustainable as well. In general, big developers feel more comfortable moving forward with projects (and hiring lots of contractors) thanks to the protections provided by performance surety bonds.

How Are Performance Bond Penalty Amounts Determined?

Performance bond amounts are tied to the contract being bonded. When an obligee awards a contract, the bond amount is based on what the contractor determines it will take to complete the job and benefit the contractor. The amount includes expenses for labor and materials, but also any required insurance and bonding expenses among others. When a surety reviews a contract prior to quoting a performance bond, they also consider the contract amount and whether it is truly sufficient to cover the job. If the surety determines the contract amount is sensible, the bond amount is set to match the contract. The term bond amount refers to the total amount the surety will pay out on behalf of the principal to settle claims filed by the obligee. For example, with a $100,000 performance bond, the surety will pay the obligee up to that figure but not above it.

How Much Does a Performance Surety Bond Cost?

The cost of a Performance Bond (the "rate") is a small percentage of the full contract amount, usually between 1% and 5%. The rate varies from contract to contract. A highly qualified contractor may receive lower rates than a contractor with worse credit or financial deficiencies. Usually larger contracts have premiums that are a smaller percentage of the overall bond amount, while smaller contracts are priced a little higher but have fewer underwriting requirements. Viking Bond Service, Inc. will always offer the program that is best suited for the contractor at the lowest rate possible.

Many factors may influence the cost of a Performance Bond, including:

  • The amount of the bond
  • The contract size
  • The state where the contract is held
  • The surety provider
  • The principal's credit
  • The principal's financial status
  • The type of work: some surety providers may be more willing to provide Performance Bonds based on the type of work being performed.
  • The principal's job performance history
  • Brokers' and agents' fees: Commissions, and operating costs such as overnight fees, credit report charges, etc.

If you would like the developer to cover the costs of your Performance Bond, you can include your bond costs within your bid. However, it will increase your bid, which may lead the developer to select a competing contractor.

Bad credit may be an obstacle for some surety bond applicants depending on where they apply for a bond. Some companies consider these applicants to present too much risk and deny them for surety bonds outright. Fortunately, not every company takes this approach. At Viking Bond Service, we make the effort to find the best terms for ALL our clients, regardless of credit. In many cases, we can provide bonding where other companies either didn't make the effort or didn't have the surety relationships to get the bond placed. With our help, bad credit doesn't have to keep you from getting the performance bond your business requires.

Performance Bonds, Payment Bonds, and Bid Bonds: A Seamless Bond Line

Performance Bonds are part of a series of Contract Surety Bonds including Bid bonds and Payment bonds. Payment and Performance bonds, when required together, act as a bond line for a specific contract.

Consider your bond line as a pre-approved credit line, which includes individual limits for each bond, and a total limit that consists of all of your bonds combined.

Bid bonds are the first step; they guarantee that you will be able to fulfill your contractual obligation of obtaining a Performance Bond in the event that the developer selects your bid.

Once you've been awarded the bond, you'll need a Performance Bond, as well as a Payment Bond, if also required, which guarantees that you will pay the laborers, suppliers, and subcontractors necessary to complete the job. Usually, Payment Bonds and Performance Bonds are packaged together within a single rate. The difference between the Performance Bonds and Payment Bonds is that while a Performance Bond guarantees that the job is completed, a Payment Bond guarantees that those who worked on the project are paid appropriately. Viking Bond Service is equipped to provide you with all the bonds you need from the start to finish of a project. Make the bonding process easier on yourself by working with one surety provider throughout.

How Are Claims Handled for Performance Surety Bonds?

The surety company that issues the performance bond guarantees payment for all claims, but only as long as they hold up under investigation. In some cases, it's relatively easy to prove a principal didn't meet the conditions of the contract. In other cases, it's less clear and more contentious. In both cases, the surety company enlists whatever resources necessary - lawyers, investigators, construction experts - to definitively prove if a claim is or isn't valid. Validated claims receive immediate remediation, but this isn't the end of the claims process. Since the principal has financial responsibility for all claims in all instances, the surety has the right to collect the amount of the claim from the principal using any legal means available and with interest and fees added to the debt. After the principal repays the surety, the claim is fully settled. Allow us to emphasize the fact that claims that go through the surety are more expensive than claims settled between the principal and the obligee directly, or avoiding claims at all. For contractors eager to keep bond costs low, do everything possible to avoid claims (meaning do everything mandated in the contract), and try to settle disputes without involving the surety bond.

What Do You Need to Secure a Performance Bond?

There are many variables that determine the requirements for Performance Bonds, as the risk to the surety varies widely. To obtain a bond, you will need to provide:

  • Information about the job, including:
    • The project description
    • The amount of your bid
    • Your source of funding
  • Your personal information and your company's history, including:
    • The amount of time your company has existed
    • Your bonding history
    • Your personal credit standing
  • And business financials, including:
    • A balance sheet
    • Income statement
    • Cash flow statement
    • Work schedules
    • Complete notes and disclosures

For projects valued at $350,000 or less, it is possible to secure a Performance Bond on the basis of your tax returns alone, provided that you have good credit.

For larger and more complex Contract Performance Bonds, we require a full submission that consists of:

  • A credit check
  • A full length Contractor questionnaire
  • A copy of the contract or bid invitation
  • Your prior year and current business financials
  • Personal financial information on owners
  • A bank letter.

Your Surety Provider Matters

Choosing the right surety bond provider can make a big difference. You want a provider who can give you great rates, and expert information on all of your surety bond needs. While selecting a provider, be sure to find out about their claim support. Remember, if someone makes a claim on your bond, you are responsible. Having an agent that can help you in the case of a claim is very important.

Performance Bonds at Viking Bond Service

We have an expert team of Contract Bond specialists who are experienced in the inner workings of Performance Bonds in all arenas. We are here to help clients gain an understanding of the costs and requirements of their surety bonds. We have many repeat customers because of the expert service our staff provides.

Get Your Performance Bond Fast

Viking Bond Service provides streamlined programs for contracts up to $250,000 that have proven to be very successful for contractors with limited bond activity. We can underwrite and issue these bonds quickly, and typically only require a credit check, a copy of the contract or bid invitation, and a short application.

If you're ready to get the project rolling, feel free to complete the contact form on this page. If you need more in-depth information, one of our bond specialists would be happy to connect with you directly regarding your specific bond requirement. Call us at 1-888-278-7389 for expert guidance about performance bonds specifically and surety bonds generally. You can also request a no-obligation quote at any time.

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