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Duke Revard By Duke Revard • February 1, 2017

The Three Things You Need To Know About Performance Bonds

what is a performance bond

 

 

#1: What is a Performance Bond?

 

A Performance Bond is a surety bond guaranteeing a contractor will complete a project according to the term delineated in the contract. Performance Bonds offer a protection to taxpayers, as they ensure that public works projects are completed properly as required by federal law (The Miller Act).

Payment Bonds, Suppy Bonds, and Maintenance Bonds are often required along with Performance Bonds.

  • Payment Bonds guarantee payment to all subcontractors and suppliers
  • Supply Bonds ensure that materials will be provided according to the contract
  • Maintenance Bonds guarantee a contractor's work will be defect free for a specific time frame after completion.

 

#2: How Much Does a Performance Bond Cost?

 

Performance Bond rates are based on a percentage of the total contract amount. Surety bond companies will offer lower rates to companies with strong balance sheets, which makes it essential to leave some net profit in the business each year.

Surety bond companies require a minimum amount of equity and working capital based on the bond line provided, as it proves vitality and profitability of the company.  

The cost of a Performance Bond usually is less than 1% of the contract price. There are cases where the premium might be higher. Such cases include when the contract amount is under $1 million, or if the contractor has poor credit.

 

#3: How do you get a Performance Bond?

 

Not everyone can qualify for a Performance Bond, as surety bonds more resemble a line-of-credit than they do a traditional insurance product. Underwriting guidelines from surety bond companies vary depending on the size of the contract.

Smaller contracts, around $300K and under, are based strictly on the owners' personal credit. However, underwriting for larger contracts will be more extensive.

Larger Performance Bonds necessitate an increased bond line, which is determined by the pre-qualified bonding limits of the contractor that have been set by a surety bond companies’ underwriter.

 

Curious about what you would pay for a Performance Bond? You can get a free quote so you can see how much you'd pay before committing to buying. Getting a free quote is easy and there's no obligation to buy:

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