Questions About Performance Bonds

performance bond - What is a performance bond - minimalist home

What is a performance bond? 

A performance bond is basically an insurance policy. It covers the obligations of the general contractor on a construction project, meaning it protects you or your client if something goes wrong on the job site. Most clients are required to provide some sort of security for their projects, especially if they’re larger than $100,000 in value. 

If future costs arise that were not covered at the time of pricing, then you’ll want that extra protection. Insurance companies issue these bonds and require that you pay them an annual premium based on the total amount of work. 

The higher the risk associated with a project, however, determines how much this annual fee will cost. Moreover, not all contractors qualify for a performance bond. A solid history in business and good credit are necessary requirements.

What is the purpose of a performance bond? 

The purpose of the performance bond is twofold; it guarantees that subcontractors (and suppliers, too) get paid for their work, and that material costs are covered. For example, if the contractor you hired fails to pay subs or suppliers, your bonding company would make sure everyone gets paid. 

If the subs fail to deliver what was ordered according to specifications, your bonding company would cover those costs (plus interest). Another benefit of bonded projects is that changes can easily be made because there is less risk involved. Changes are generally covered by the contractor’s insurance, so it doesn’t eat into your budget.

What is the difference between a bid bond and a performance bond? 

A bid bond holds you responsible for certain actions when you’re bidding on projects. It ensures that if another contractor wins the job, you can pay him what was offered in his bid. A performance bond ensures that the work will be completed according to specifications and all subcontractors or suppliers get paid accordingly. One protects your profits; one protects your investment.

A bid bond guarantees you’ll get a certain amount of money, or it will be issued to the winning bidder. The performance bond covers all the work that is outlined in your contract. If anything should go wrong during construction, your insurance company ensures that you get paid for your loss.

How long do I have performance bonds? 

Generally speaking, performance bonds are good for 1 year from the date they’re issued. The rate can vary depending on how big a job is and if there have been any prior claims against it. But generally speaking, annual premiums cost around 1% to 2% of a project’s value. You should receive a renewal letter every year before the expiration date so you know when to re-up with your surety.

There are many conditions, but the two main ones include: 1) your work must be in accordance with your contract and 2) you must have taken necessary precautions. It is vital that you follow all rules outlined in your contract or else there could be serious consequences. 

Your contractor’s license could even get suspended if they violate any laws while working on your project. If for some reason, you’re unable to complete construction, then it’s best not to sign things over until everything has been agreed upon by both parties involved. There should definitely be an attorney present to go over all of this.

Is there any recourse against a performance bond? 

Yes! If for whatever reason, you find yourself in this situation, you should definitely consult your attorney. He can inform you of all of your rights and what to do next. Sometimes the surety company will agree to an extension if they feel as though something was not your fault. In other cases, they may require a new bond especially if the contractor’s license has been suspended or revoked.

The bottom line is that performance bonds are very beneficial for both contractors and clients alike! Although it does cost money every year, it could save you a lot of money down the road on unforeseen expenses that might come up during construction. 

How much will my performance bond cost? 

The cost of a bond will vary between companies. It’s best to compare their rates before making a decision. Generally speaking, you might be able to get a better deal with annual premiums of around 1% to 2% on your construction budget. If the contractor is using an attorney or broker, he may be able to offer you some discounted prices.

A lot of people don’t know that there are many performance bonds available for purchase online. All you have to do is fill out some simple forms and wait for them to process before getting it sent over via fax or email within 24 hours! This saves everyone time and money because it can all be accomplished right from the comfort of your home without having to leave work early.

Interested in performance bonds? Check out Executive Surety Bonds now!

 

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