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Duke Revard By Duke Revard • March 22, 2017

What Are Performance Bonds And When Do You Need Them?

what is a performance bond

 

It's not a secret that consumers have been burned by unscrupulous contractors time after time. Whether it's because of contractors questionably subcontracting out projects, delaying the development and going over budget, or applying other deceitful practices, consumers have now become extra cautious when hiring contractors.

One way that both contractors and clients can protect themselves is through a Performance Bond.

What is a Peformance Bond?


A Performance Bond is a surety bond that guarantees adequate completion of a project done by a contractor. This bond is usually required in addition to the contractor's license bond.

Performance Bonds have been a major facet of the business, construction and financial industries since 2,750 BC and later improved upon by the Romans in 150 AD, according to the book "The Law of Performance Bonds." 


With a Performance Bond, a client is provided with a safety net. They can identify what kind of work they want done and in what timeframe, which then means they can hold the contractor accountable.

 

Performance Bonds are usually taken out by government agencies and larger corporations.

 

Free Performance Bond Quotes!

 

When Do You Need a Performance Bond?



Sometimes Performance Bonds are issued on behalf of a client hiring a contractor to construct a building to their specifications. If the contractor is unsuccessful in meeting the requirements (whether it's due to falling behind schedule, bankruptcy or they back out of the agreement) then the client can make a claim on the Performance Bond.

 

You can learn more about how the bond claim process works. 



In order to stand out from the competition, contractors advertise Performance Bonds to win lucrative contracts and big projects as it encourages a form of trust between the two parties. However, a contractor can also be hurt by a Performance Bond if the project violates the terms of the agreement or the customer is not satisfied with the job. This means that a contractor must be truly confident in their work.

 

Who is Involved in a Performance Bond?

 

There are a variety of Performance Bonds, otherwise colloquially known as "good faith money," but they should not be confused with security or insurance bonds - think of it as construction insurance without all of the hefty premiums.

In establishing a Performance Bond, there are three primary parties involved in the entire process: 

  • Contractor: Pays for the bond
  • Surety bond agency: Produces the bond and makes the bond official
  • Owner: Protected by the bond

 

How Much Does a Performance Bond Cost?

 

Contractors pay anywhere between two and four percent of the bond amount. This means that if a contractor has been hired to perform a $10,000 job then they'll pay anywhere between $200 and $400 for the Performance Bond.

There are three primary decisive factors to determining the cost of a Performance Bond: bond type, applicant's risk and bond amount. For projects valued at approximately quarter of a million dollars, contractors are usually asked about the bids, the company's history, credit score and if the firm has ever been bonded before.



Performance Bonds offer plenty of advantages to all of the interested groups. A contractor becomes a marketable company, the contractor is safe and secure in the deal and the bond issuer garners a new client. In the middle of construction season, it may be time for a Performance Bond.

 

Free Performance Bond Quotes!