A Performance Bond is a Surety Bond issued by an insurance company to guarantee satisfactory completion of a project by a contractor. A job requiring a Payment & Performance Bond will usually require a Bid Bond, to bid the job. When the job is awarded to the winning bidder, a Payment and Performance Bond will then need to be issued by the Surety company to begin working on the project. If the contractor fails to complete the project, according to the specifications laid out by the contract, most often due to the bankruptcy of the contractor, the client is guaranteed compensation for any monetary loss up to the amount of the Performance Bond.
Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such Bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects.
Contract Bonding is a category that covers multiple different bond types including Bid Bonds, Payment Bonds, Performance Bonds, Supply Bonds, Maintenance and Warranty Bonds. Each type of Contract Bond covers protects the project owner (obligee), and the general public, in its own unique way.
What Is Needed To Apply for a Construction Bond?
Not everyone can qualify for a construction Bond, as Surety Bonds are a form of credit, not insurance.
Underwriting guidelines vary, depending on the size of the project. Smaller projects ($350k and under) are primarily underwritten based on the owners’ personal credit. However, underwriting for larger contracts is more extensive. Please see below for a detailed explanation of what is required for larger construction Bonds.
|Project Size – Less Than $350,000||Project Size – Greater Than $350,000|
What do performance and payment bonds cost?
Rates are based on a percentage of the total contract amount, not just the bonded portion of the contract (if it varies). Example: The contract amount is $100,000. The rate you qualify for might be 2.5%. The premium due will be $2,500.
I have bad credit. Can I get a payment and performance bond?
Typically, no. Smaller contractors are underwritten based solely on personal credit and there are not insurance companies available to support high risk payment & performance Bonds. Larger contractors, with strong business financials and appropriate experience, can get approved should the owners have credit issues.
When do I need a payment and performance Bond?
A Payment & Performance Bond is needed when you are awarded a contract with payment & performance bond requirements. If the contract required a bid bond, a payment & performance Surety Bond will usually be required after.
My business is new. Can I get a Surety Bond?
Yes. You will be able to acquire smaller Bonds with adequate personal credit history.
Why do you need my spouse’s information?
Your assets were merged upon marriage. With Surety bonding, you are corporately and personally responsible for repayment of Surety Bond claims. Therefore, the Surety requires your spouse to personally guarantee your company. In addition, if your spouse is unwilling to provide a personal guarantee, it will cause conflicts in the underwriting process and may result in a negative outcome.
How To Qualify For Larger Construction Bonds
Hiring a construction CPA is important when trying to qualify for a largeer contractor performance bond (Greater than $350k). The business financial statement is the primary item Surety Companies will review when determining the Bonding capacity that will be offered to the contractor. If a CPA unfamiliar with construction accounting is used, statements will likely be improperly prepared, which will cause issues during the underwriting process. It is important to speak openly with your Bond Agent and CPA about your Bond limit goals, so that expectations are properly set.
Working with a proficient Surety Agent is also crucial. Surety Bonding is a highly specialized field and the experience of a standard P&C insurance agency may be insufficient for your needs, unless they have dedicated Surety experts on staff. Skilled Surety Agents have direct access to the best insurance companies, which means they can provide the lowest rates and the highest quality of support. They also can work directly with a CPA to ensure the contractor being reviewed is presented properly.
Large performance Bonds are fully underwritten, which means that the contractor’s business financial statements, experience in the construction industry, banking records, references, personal credit, and personal financials will be reviewed.