Performance Bond FAQs

Q: What is a Performance Bond?

A: A performance bond is a type of contract bond that is often obtained in conjunction with a payment bond. A performance bond is a guarantee between 3 parties — the principal, the obligee, and the surety. The performance bond is issued to the contractor (the principal) guaranteeing their performance as agreed upon in the initial contract they bid on and won.

Q: Is a Performance Bond a type of insurance?

A: Bonds are a specialty form of insurance issued by a Surety company but they are different from a normal insurance policy because it is a contract between 3 people versus 2 and the person who may benefit from the claim is the third party. The primary person under the bond is the principal who is responsible for fulfilling any contractual promises, otherwise, a claim can be made to the surety. The surety would then pay the obligee, while the principal is responsible for paying the surety back.

Q: How is a performance bond underwritten?

A: A surety underwriter is responsible for checking financial information including credit history of both the business and the owners requesting the bond (principal). This financial information is the main deciding factor on a principal’s eligibility to obtain the bond. The surety underwriter will decide whether or not the principal has the capabilities and history to fulfill the promises agreed to in the contract. The underwriter is experienced in deciphering whether or not a principal has good enough standing to receive the bond and perform in good faith.

Q: What is an indemnity agreement?

A: The indemnity agreement is legal document that maps out the Principal’s full obligations in regards to the relationship they have with the surety and the bond agreement. It explains how the Surety will recover any losses paid out on behalf of a claim made against the Principal’s bond. The indemnity will also explain that the Principal is the responsible party under the bond and is required to payback the surety for any claims they incurred to do the Principal failing to meet the obligations as agreed upon in the contract with the obligee.

Q: Do contractors need to be in business for a certain amount of time in order to be bonded?

A: While longevity and financial stability will help a contractor get the best terms for a performance bond, it is not required that a contractor have a certain number of years in the industry under his belt. A new contractor can be bonded through various specialty programs that are built to help small businesses grow. Between the SBA bond guarantee program or specialty programs for hard to place bonds, a new contractor can easily get bonded with the help of The Surety Place.

Q: How much does a performance bond cost?

A: The cost of a performance bond will vary based on financial stability and business history but most performance bonds cost between 1% and 3% of the contract price. Bonds can cost a contractor more if personal credit is poor because it becomes a higher risk for the surety to do business with someone who is considered “hard to place.” Most sureties have specialty programs to help contractors get the lowest premium with the best terms possible.

Q: Is a credit check required for performance bonds?

A: Yes, credit checks are required for all performance bonds. An analysis of a contractors credit history is part of the performance bond underwriting and review process. Financial statements both for the business and the contractor’s personal finances are also required for performance bond underwriting. This will help the surety decide whether or not the contractor qualifies for certain express programs based on excellent credit alone. Financial history and credit history will determine how the surety prices and underwrites the bond.

Q: What happens when a claim is filed against a performance bond?

A: When a claim is made against a performance bond, the surety will conduct a full investigation as quickly as possible in attempt to avoid any further damage or loss. Just because a claim is made, does not always mean the principal is at fault and will need to pay. It is after the investigation is performed that the surety will decide if the claim is valid and the principal is at fault and in which they will be reminded of their financial obligations under the indemnity agreement. It is at this point that the principal must satisfy the claim and if he/she chooses not to, then the surety will arrange a settlement with the obligee and collection proceedings will be implemented against the principal to ensure the surety does not incur any financial loss. All claims must be handled as quickly as possible as an outstanding claim can significantly hurt your business.

Contact The Surety Place today to request your PERFORMANCE BOND TODAY