Performance Bonds

Performance bonds are a key component of contract bonding within the construction industry. In short, performance bonds basically ensure that contractors will complete a project with quality work. In the event that the contractor does not satisfactorily complete the job for which he was contracted, the performance bond prevents financial loss for the project owner.

Contractors typically need to provide a performance bond upon being awarded a contract. Oftentimes performance bonds are issued simultaneously with payment bonds, and together they are among the most common surety bonds on the market. Although they are so heavily utilized within the industry, many contractors fail to understand their exact purpose.

Surety Bonds in Construction

The federal Miller Act mandates the use of surety bonds for all public construction projects that exceed $100,000. However, some laws at the state or local level could mandate the use of bonds on public projects that cost as little as $2,000. Although they are not legally required, many private projects also incorporate performance bonds.

Each performance bond issued acts as a legally binding contract between three parties:

1. the principal: the contractor who purchases the bond to guarantee the quality of his performance
2. the obligee: the entity that requires the bond, such as a government agency or other project owner
3. the surety: the agency that provides a financial guarantee of the contractor's work by issuing the bond

If there is a problem with the project due to inadequate performance, the wronged party can file a claim on the bond. If the claim is found to be valid, the surety company that issued the bond will make sure the bond contractor compensates the harmed party. Since this procedure brings a neutral third party in to execute the agreement, it can provide a certain measure of reassurance to those involved with any project, particularly large and expensive developments.

Performance Bond Costs

Premiums for performance bonds vary for a number of reasons, such as the job's projected cost, the contractor's financial history, and the jurisdiction in which the bond will be issued. Contractors who have a good credit score usually pay a fee that costs between .5% and 5 percent of the bond amount. So if a contractor needs to purchase a $100,000 performance bond, he will pay the surety provider a $500 to $5,000 premium.

Some surety providers will work with contractors who have poor credit, however they will charge a considerably higher fee that could range anywhere from 10 to 20 percent of the bond amount. SuretyBonds.com aims to help every contractor get the bond he needs for a competitive rate.

Get a Performance Bond

Contractors purchase performance bonds while a project's initial contract is being negotiated. In rare cases insurance companies issue these bonds, although surety bonds are not insurance and should not be mistaken as such. With ever-increasing bonding regulations within the construction industry, special niche businesses like SuretyBonds.com have emerged to provide more comprehensive bonding services.

Contractors can fill out an application online in just a few minutes. Once financial records have been reviewed and payment has been received, the surety will issue the bond to the contractor who can then proceed to produce quality work on the exciting new project.