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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? Most often, it's done by requiring the one hired to obtain a performance bond. For anyone seeking work in the construction industry, it's crucial to understand how this common type of surety bond works and why it is critical to your business. Viking Bond Service is here to break it down for you – and to supply the performance surety bond your business needs.

What is a Performance Bond?

A performance bond is a type of surety bond given by an insurance company to ensure proper completion of (or the performance on) a project by a contractor. Contractors needing a performance bond typically work in construction or service industries like bus drivers and janitors. The project's owner will require the bond as protection for the specified project. It is also called a contract performance bond and ensures that the bonded contractor has the resources and abilities necessary to complete the projects they bid on. A performance surety bond benefits the client by providing a way to pursue financial compensation if a hired contractor falls short of performance requirements. Performance bonds are typically required for city, state, and federal government projects, as well as by many private developers.

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 this risk. Thanks to performance surety bonds, construction projects are more efficient and economically viable for everyone involved.

Any contractor or business involved with the construction industry will likely need a performance surety bond eventually. Some are even required to obtain new performance bonds for every project. Further, bonded contractors enjoy a competitive edge over those without, making bonding an essential part of your business. This page outlines everything a contractor (or someone hiring a contractor) needs to know about performance bonds.

How Does a Performance Bond Work?

There are three parties fundamental to a performance bond:

  • Principal – The contractor or business entity performing the construction project. The principal must pay the upfront performance bond cost, pay to have the bond renewed, and repay the surety for settling any claims filed against the bond.
  • Obligee – The party that hires or contracts with the principal to perform the job. This is the party that details the surety bond requirement and the one that benefits from any claims filed against the bond.
  • Surety – The financial institution that guarantees that the principal's obligations will be performed. The surety company agrees to guarantee payment for valid claims up to the total surety bond amount. Sureties are similar to (sometimes divisions of) insurance companies.

Each party described above plays a role in any performance bond claim. For example, a project owner (the obligee) may require that a general contractor (the principal) provide a performance bond to win a contract. If the principal fails to perform their duties, the obligee may call upon the surety to pay compensation out of the performance bond. These payments are for damages up to the bond's limit.

In the same way, a general contractor obligee may require a subcontractor to provide a performance bond to secure a subcontract. If the principal fails to perform their duties under the subcontract specifications, the obligee may call upon the surety to pay damages out of the performance bond up to its limit. When subcontractors provide performance bonds to general contractors, it is also called "bonding back."

Surety bonds are not insurance. The principal must repay any monies paid out by the surety in the event of a claim.

A Performance Bond Example in Action

It helps to see how the entire bond process plays out to understand fully how performance bonds work. Consider this hypothetical example:

A general contractor gets hired by a city to handle a large renovation project. The work contract stipulates the budget and timeline for the project. It also requires a performance bond.

  1. The general contractor secures the required bond, finalizes the contract, and starts renovating.
  2. Despite the performance requirements stipulated in the contract, the renovation project takes weeks longer than expected. Those delays could be costly to the city.
  3. The city files a claim against the bond for damages equal to the money lost due to the delay. This is their right as the obligee.
  4. The surety that backs the bond investigates the claim to determine whether the general contractor failed to meet the deadlines outlined in the work contract.
  5. The extent of the losses will also be investigated. The surety employs investigators and accountants as necessary to ensure a thorough investigation.
  6. If the investigation validates the claim, the surety compensates the city for the full amount of the claim, up to the bond limit, without delay.
  7. Finally, the general contractor repays the claim amount to the surety. The final amount will include interest based on how long the debt went unpaid, fees related to the cost of the investigation, and other administrative expenses.

How to Apply for a Performance Bond?

Viking Bond Service makes obtaining a performance surety bond straightforward. First, prepare to submit a bond application that asks for information about your business, finances, and background. You will also need to submit to a credit check and provide a copy of the performance bond requirements outlined in the contract. Additional documentation may be required as well.

Different projects may require additional documentation. Contact us, and one of our bond specialists will guide you through the process to get you the best terms for your performance bond request. No matter what kind of performance bond you need, we've got you covered.

How Much Does a Performance Bond Cost?

Many factors play a role in the final performance bond cost, which is a small percentage of the full contract amount, usually between 1% and 5%. The exact surety bond cost depends on several variables, 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 and bonding history
  • Brokers' and agents' fees: commissions, and operating costs such as overnight fees, credit report charges, etc.

Applicants with higher credit scores who have never had a claim filed against a bond will pay a lower percentage of the total. However, applicants with issues like the following will pay a higher percentage of the performance bond total:

  • A credit score below 700
  • A blemish like bankruptcy on their financial record
  • A previous claim on a bond (performance or otherwise)

Viking Bond Service provides surety for a wide range of businesses and applicants. For those with complicated credit histories, we offer a poor credit surety bond program. We strive to provide the lowest possible premiums for every client. If you need a performance bond quote and have poor credit, you may be required to provide collateral for the bond.

Whatever your performance surety bond needs, our bonding experts will guide you through the process, helping you to get the best deal possible. If you have been turned down for a performance bond in the past, we urge you to apply with us. We are proud of our record of getting more people approved for the surety bonds they need.

When is a Performance Bond Required?

Performance bonds are required for a wide variety of projects. The Federal Miller Act requires construction performance bonds for all federally funded construction 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.

Typically government projects and those in the real estate industry require performance bonds. They are required before beginning most construction projects. Generally, before being awarded the construction contract, you will have already submitted a Bid Bond. This demonstrates that you've agreed to secure a performance bond if you are contracted to perform the job.

Some service contracts unrelated to construction also require performance bonds. For example, those seeking school bus contracts or to perform janitorial services may require bonding. Whenever a contract requires a performance bond, it's essential to begin the bonding process immediately. It doesn't take long once you've picked out the right surety agency. However, you can't finalize a contract or get paid for any work until you have the necessary surety bond. So, don't wait longer than necessary.

Performance Bond Requirements

When it comes to performance bond requirements, they vary based on the scope of work to be performed. 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. At Viking Bond Service, Inc., we have streamlined programs available for contracts up to $250,000. These programs have proven to be highly successful for contractors with limited bond activity. These performance surety bonds are underwritten and issued quickly and typically only require a credit check, a copy of the contract or bid invitation, and a short application.

We generally require a full submission for larger and more complex contract performance bonds. This typically consists of a credit check, a full-length contractor questionnaire, a copy of the contract or bid invitation, business financials for the prior and current year, personal financial information on owners, and a bank letter. Contact our bond specialists to learn the exact bonding process for your specific needs. We can guide you through the process and answer your questions at every step. The consultation is free and without obligation.

Who Pays For a Performance Bond?

The bond principal pays for a performance bond. This is the person or company hired to perform the contracted work. If you would like the project developer to cover the costs of your construction performance bond, you can include your bond costs within your bid.

Do You Need to Renew a Performance Bond?

Performance bonds remain in force for the duration of the contract. They do not renew, but since they are tied to a contract, they are affected by changes in the contract that occur post-bond issuance. The surety company will periodically check with the obligee, the contract owner, for a status report on the contracted job. These status checks provide the surety with progress reports and notifications when the job has been completed.

An overrun occurs when the contract amount is increased or when the project exceeds the expected completion date for the contract. Overruns are not performance bond renewals but represent additional exposure to the surety backing the bond. Therefore, when the surety learns of an overrun, either from a status check or from a completion notification, the surety will bill the principal for any additional exposure created from the overrun.

When you know an overrun will occur, it's a good idea to notify your performance surety bond provider as soon as possible. When an overrun occurs, an additional premium is due to the surety. Including this additional premium upfront when billing the obligee for contract extensions is good practice. As always, Viking Bond Service strives to make the bonding process as simple as possible for all involved. We have developed internal controls to make reporting and accommodating overruns quick and easy.

Get Your Performance Bonds Today!

Contact a bonding expert at Viking Bond Service today for a free consultation. Our expert performance bond specialists are experienced in the inner workings of contract requirements in all arenas. We can help you understand what will be required and the costs associated with the performance bond you need. We can also determine your maximum bonding capacity. Contact us by calling 1-888-2-SURETY (1-888-278-7389) or completing the contact form on this page.

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