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Performance Bond
What is a Performance Bond?
A Performance Bond or Performance Surety Bond is often used as a generic term to describe a surety bond that guarantees the performance of an obligation — whether under a license, permit, contract, or court order.
A Performance Bond that guarantees the satisfactory performance of duties under the terms of a contract are commonly called Contract Bonds. These types of surety bonds are used very commonly in the construction industry and are usually coupled with Payment Bonds. Together, these bond types are commonly referred to as P & P Bonds, a Construction Bond or a Contract Bond.
However, they can be used on many other types of contracts where the risk of nonperformance by the contractor is high and can be costly to the Obligee (project owner). For example, these Performance bonds can be Service Contract Bonds, Supply Bonds, Maintenance Bonds, Food Service Bonds, Security Guard Service Bonds, etc.
Performance bonds, like all surety bonds, are a written guaranty involving these three parties:
Principal: the person whose performance is being guaranteed and the one posting the bond.
Obligee: the person or entity that is requiring the bond and is therefore protected by the bond, i.e. a project owner.
Surety: the entity (almost always a licensed and A.M. Best-rated insurance company) that issues the bond and guarantees the performance of the contract by the Principal. So if the Principal defaults or does not perform to the standards of the contract then the Surety will be called to step in to compensate for the loss, hiring another entity to finish the job correctly or by paying the Obligee for any damages incurred.
A Performance Bond is a broad term that can be used to describe a protection tool for many types of contracts, not just construction contracts, where the project owner wants protection from contractor default or nonperformance. Some examples of performance surety bonds in the construction industry include subdivision bonds, completion bonds, maintenance bonds, right of way bonds, and site improvement bonds. Examples of performance bonds for other industries include all types of service contract bonds and supply bonds including food service, janitorial service, computer service, garbage handling, recycling and removal, and landscape service.
Contractors are generally required to post a bid bond when bidding on a project, especially when bidding on public work. The bid bond guarantees that the contractor will enter into the contract and also, typically, provide a performance bond and/or a payment bond if awarded the contract.
It is important to know that surety bonds are very different than insurance. If there is a legitimate claim on a bond due to contractor default or incomplete performance, the Surety will hire another contractor to complete the project or repair the defective work, or the Surety will complete the project or repair the defective work themselves. The originally bonded contractor is then responsible to reimburse the Surety for all costs the Surety incurred for addressing the claim and completing the project up to the originally bonded amount, including legal fees. Therefore, applying for Surety credit is similar to applying for an unsecured loan in that a bond is an unsecured credit instrument wherein the surety is backing the Principal to perform with its very strong creditworthiness. As such, the performance bond acts like insurance to the Obligee, not to the Principal.
Due to the associated risk from the perspective of the bonding company, Performance Bonds can be very carefully underwritten. Part of the cost of this bond will be the time and effort needed to provide the documentation and information the bonding company will need.
The actual price paid for a Performance Bond varies. In most cases, the bond will be required to cover 100% of the contract amount. In some situations, the Obligee may even require the bond to cover up to 115%-120% of the total contract amount, and in others, it may be a percentage of the contract amount.
The cost/premium charged for a Performance Bond is almost always charged as a percentage of the overall contract amount or bond amount.
As Performance Bonds can cover such a vast array of underlying obligations and risks, it’s difficult to determine what the costs may be without having more information on the obligation.
Being that the bond is protecting the Obligee, it is best practice for contractors to include the cost of the Performance bond in their estimates of the projects where it will be paid for by the Obligee.
Contact our surety experts for a determination of costs for the bonds on a particular project.
Credit, Capacity, and Character are the three (3) C’s sureties use to determine bondability and bond rates. Details that are considered are:
Financial strength and experience.
Type of work and the size of the project.
Good information: The better information a contractor can provide the surety company to demonstrate experience and financial stability, the easier it will be for the surety company to bond the contractor and provide the best rates available.
The stronger the experience and financial strength the lower the rate will be.
Depending on the size and complexity of the bond needs, it is important to know that it may take some time when establishing a new bonding relationship. In some cases, your bond request may be handled and approved the very same day. In other cases, more information and data may be needed for the benefit of all the parties involved in the bonded agreement in order to move things forward.
As a seasoned surety bond-only agency, The ProSure Group has streamlined this bonding process and enjoys the support and great relationships of many of the finest surety insurance companies in the world. In addition to our experience, we have:
Specialized programs for many industries and classes
In-house underwriting and authority
Over 23 years of building very solid relationships with over 30 surety insurance carriers
All of these features allow us to respond quickly to a bond applicant’s needs with a viewpoint from an extremely large and diverse cross-section of the surety industry
Due to the nature of the surety relationship, Bond applicants must be willing to be transparent and willing to submit private information when applying for a performance bond, especially for large projects. Depending on the bonded obligation, performance bond requirements may include:
Personal credit information, personal financial information, company ownership information, project contracts, a work in progress (WIP) schedule, and business financials.
Applicants must also be prepared to sign a general indemnity agreement (GIA) once they have been accepted by a surety. A GIA is a contract between the bond applicant (principal on the bond) and the surety company that guarantees the principal will compensate the surety, using both corporate and personal assets, for any expense or loss the surety incurs due to bonds issued on behalf of the principal. This is standard practice and is a requirement no matter what surety company writes the bond. It’s a common viewpoint in the surety’s eyes if a business owner isn't willing to indemnify (back) their business then the surety should not be willing to either.
If a contractor is performing work on a project for the Federal Government with a contract value of $150,000 or more, they are required to post a performance bond by law. That law is the Miller Act of 1935, which was passed to protect taxpayers and subcontractors and suppliers from contractor default or nonperformance. At the state level, each state has adopted its own version of this act, known as Little Miller Acts. Therefore, state-sponsored projects may require performance bonds for projects with contract values less than $150,000.
Private project owners may require bonds to protect their investment and see performance bonds as a vote of confidence from a third party that a contractor is stable and capable of fulfilling certain work. General Contractors or Prime Contractors often times require Performance Bonds from their subcontractors, as well. These are typically known as Subcontractor Performance Bonds.
A Performance Bond is required by a project owner, known as an Obligee. They are normally requested by governments, local, state, and federal, governmental agencies, private project owners, and in the case of subcontractors, many prime contractors. The Obligee requires the bond because they want a guarantee that a project will be finished on time and under budget. An Obligee will also require a bond so they can know a contractor is capable of completing such a project because an unbiased entity has reviewed the contractor’s experience and financial standing and has concluded that contractor is fit to provide such work.
Upon execution, a Performance Bond becomes part of the contract. So, the bond will be in place for the length of time it takes to complete a project as stated on the contract, plus an additional length of time known as a warranty period. Most performance bonds will have a warranty period of one to two years, which is guaranteeing the performance of craftsmanship and the materials used on the project for that extended period after the project's’ completion. Some performance bonds will renew on an annual basis depending on the type of contract. Service contract bonds are one example that will renew every year for the length of the contract.
Most performance bonds will be billed for once the bond is issued, in the case of renewable bonds, they are usually billed on an annual basis if the contract can be canceled.
In many cases, the Obligee will provide the bond form in a package with the contract. It is very important to review this document because not all surety bond forms are the same. The ProSure Group recommends, if possible, to use an AIA A312-2010 Performance Bond. The American Institute of Architects (AIA) collaborated with members from various industry groups including contractors, attorneys, surety bond producers, engineers, and insurance agents to provide this bond form as an industry standard, representing fair and balanced interests for all users.
As surety bond experts in business for over 23 years in Florida, The ProSure Group has issued many thousands of Performance Bonds and has partnerships with more than 30 different surety companies. From day one The ProSure Group has specialized in providing surety bonds for the construction industry. This ensures that we match you with the best surety to fit you along with the best, most competitive pricing and terms available in the marketplace. Not only can we provide you with all of your bonding needs at low prices, but we can also say that with our assistance we can help you increase your bonding capacity and in turn help you grow your business. If you have any questions please do not hesitate to call us at our toll-free number 1-800-480-3883.
The ProSure Group has bond programs for contractors of all sizes and experience. Whether you need a bond for a few thousand dollars or for $10+ Million, we have the connections and relationships to bond your project. For smaller contractors we have Express Bond Programs available for quick and easy bonding that only requires a signed application and credit check. For larger contracts ($500,000+), more information will be required, See below.
