Performance Bonds

Performance Bonds are an essential element of contract bonding. They are typically issued with a Payment Bond upon the awarding of a contract, and together they are among the most common surety bonds on the market. In short, Performance Bonds ensure that the contractor will complete the project. In the event that the contractor does not satisfactorily complete the project, the performance bond guarantees no financial loss to the project owner.

Performance Bonds can be especially important for public works projects. For most public projects, Bid Bonds, Performance Bonds and Payment Bonds are all mandated by law. Since surety bonds are required by federal law for all projects in excess of $100,000, many jobs on private property also involve a Performance Bond.

If there is a claim on the bond due to nonpayment or other contractual breech, the subcontractor (or other wronged party) files a claim on the bond. If the claim is found to be valid, the surety company that issued the bond will make sure the aggrieved party is compensated by the contractor who purchased the bond. Since this procedure effectively 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.

The bond is purchased by the contractor during the contract negotiation phase of a construction job and is generally bought from a surety bond company or, in rare cases, an insurance company (though surety bonds are not insurance and should not be mistaken for such). The rate and amount is subject to both the size of the job and the contractor's own credit rating and financial history. Should the contractor fail to qualify for a normal bond, special bonds for those with lackluster credit can be purchased for a considerably larger premium.

The market for performance bonds and payment bonds remains more straightforward given the current economic conditions nationwide. A more stabile market means traditional underwriting practices will likely be employed. Qualified contractors can expect to find competitive rates.