Performance Bond For Construction

A performance bond, sometimes referred to as a contract bond, is a surety bond that is issued to a contractor before the start of a construction project that guarantees the contractor will complete the obligations of the project to the satisfaction of the owner of the project as agreed to in the initial contract. The performance bond is meant to protect both parties involved in the project. The Principal, usually the general contractor of the project, is often required to obtain a performance bond to ensure that the project is completed within the framework and timeline agreed upon, and if failure to do so, the obligee of the principal can file a claim against the performance to the surety. The Principal is then required to repay any money that the surety paid out on behalf of the claim made. All claims should be worked out and paid for as soon as possible as to not risk losing licenses, and business in the future. Claims against a surety bond can be detrimental for a contractor.

FAQ’s About Performance Bonds

When are performance bonds issued?

Performance bonds are issued, usually in conjunction with a payment bond prior to the start of a construction project. Depending on the type of construction project, a performance bond may be required. Most federal, state, and local governments require a performance bond for public projects over $150,000 for quality assurance purposes.

Is good credit necessary to obtain a performance bond?

It is possible to obtain a performance bond with bad credit, although your premium will be higher. It is ideal to have good credit, but at The Surety Place, we know that sometimes things happen in life that negatively affect our credit scores, which is why we have specialty programs set in place. We provide solutions just when you thought there were none!

How do claims against performance bonds work?

The obligee will make a claim against the surety bond, stating that some part of the original contract was not completed, failed to be completed during the time stated in the original contract, or dissatisfaction in the completion of the project. Every claim must be investigated and proved before any payment is made for the claim. The best way to avoid a claim against the performance bond is to not only follow the signed contract, but also work closely with the surety to make sure all issues are fixed in the most efficient manner.

What is the average cost of a performance bond?

The cost of performance bonds depends on the size of each individual project in which you are bidding on. Your personal credit score will also affect how much your premium is and the amount you will pay to the surety in order to obtain the bond. Be aware that the bigger the project, the more in-depth the surety will look into the Principal to ensure that their financial background, work and project history, and current or past bonds are all in good standing before determining how much the premium should be.

Performance Bond Requirements

What’s Required from the Contractors After Bid is Won?

Typically, the contractor who wins the bid is required to respond within 10 days or as is required in the bid specifications in order to secure the project. In order to guarantee the contract will be completed as promised, and to protect the taxpayers’ dollars, city, state, or federal regulations will often require that the contract is bonded.

At this point, the contractor will need to contact the surety insurance agency of their choice, and upon receipt of Surety’s review and acceptance of all completed paperwork, final contract and bond premiums are processed. At this point, The Surety Place will issue the performance bond necessary for the job, often with a payment bond in tow. The performance bond and payment bond will secure the following:

Guarantee the contractor will complete the work, or performance as agreed upon in the initial contract. The performance bond promises that the contractor will complete the project on time and on budget as promised in his bid. If he fails to do so, the city will be able to recoup any financial losses.
Guarantee to pay all appropriate parties on time and in full for the amount promised in the bid. The payment bond promises that the contractor will pay the subcontractors, laborers and material suppliers of the project. If he fails to do so, the city will be protected from having to compensate these workers.

How Do the Contractors Get a Performance Bond and Payment Bond?

The contractors go to a surety insurance agency to issue these performance and payment guarantees. The underwriters of the surety insurance agency will consider three things to create the contractor’s bond:

Character. Has the contractor shown good character with previously completed contracts? Has the contractor been honest with personal and business financials?
Capital. Does the contractor have enough working capital to be approved? Is the contractor’s personal credit history in good standing? Does the contractor have outstanding claims against other bonds?
Capacity. Does the contractor have the skills and ability to complete the proposed project?

There are often different programs available for construction bonds– ranging from small programs to larger programs.

Smaller contract, hard to place bonds up to $400,000

Minimal Underwriting

Prime contracts up to $3 MM with an aggregate program totaling $6 MM

Standard Underwriting

Any contracts over $3 + MM with an aggregate program totaling $6+ MM

Full Account Underwriting

Completing the Job and Ending the Bond Contracts

When the job is completed as promised, the performance bond has now been fulfilled. This, in turn, ends the performance bond contract.

To end the payment bond, the city or project owner requires paperwork that the contractor has paid all the suppliers and subcontractors. Once the paperwork has been signed by the City or project owner it’s marked as complete which ends the payment bond contract.

Should anything happen to the building once the bond contract has ended, the project owner has one year to contact the contractor for any maintenance related repairs.

Infographic Explaining Performance Bonds

Performance Bond Infographic

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Why Choose The Surety Place For Your Performance Bonds

The Surety Place, previously known as Surety Placement Services, was founded in 2002 with the number one goal to bring innovation and a high level of service the industry had not yet seen. As industry leaders from the start, we are a people first surety bond partner that you can trust! We establish a relationship with you in order to truly understand your business focus, whether it is large or small, complicated or difficult. As one of the only true specialists within the industry we supply access, partnerships and specialty programs with numerous “A” rated sureties across the nation. We pride ourselves on being here to help you; we want to service all your bonding needs with no appointments or contracts necessary.

Our industry knowledge and expertise, coupled with our specialty programs, allows us the unique ability to write your bonds when no one else can. We have over 50 years of combined surety experience, which makes us some of the best in the industry. Our dedicated account managers are all highly trained underwriters who provide our agents and clients a tailored bonding solution for individual or corporate needs. In today’s marketplace, surety access can be limited; but with Surety Place as your partner, you’ll find the white-glove service you have been searching for.

National Capabilities with a Local Feel

No matter the size of the bond or how complicated, Surety Place is built to find you an answer. Poor credit, financial hardship, fast growth, or just getting your company off the ground? We have options for you no matter what your circumstances are. We understand business. We also understand how difficult it can be when something that seems like such a small piece of the puzzle gets in the way of closing the deal or moving forward. We take that pressure off your mind so YOU can get back to work.

Need help growing your bond department?

At The Surety Place, we pride ourselves in our customer service! If you have any questions regarding a bond placement, give us a call or fill out the form to the right of the screen and one of our experienced staff members will be in touch with you shortly!