What is a performance bond?
A performance bond is a written, legal contract that guarantees that the contractor will fulfill their responsibilities. This means that if they do not carry out the agreed-upon work, they must compensate you for your loss.
They simply cannot walk away from doing what they promised to do! Whether it takes one year or five years, it doesn’t really matter – a performance bond will guarantee that the contractor moves at a pace so as not to leave you hanging.
Typically, contractors are required to have a performance bond amount equal to 100% of the contract price. In certain cases, however, it can be agreed upon between both parties that this percentage will be less.
Each state has specific laws and regulations regarding this process – for example, in Oregon, a performance bond must always cover 100% of the project’s cost.
What is the purpose of a performance bond?
There are several reasons why a performance bond is important:
- It guarantees that the contractor will not turn tail and run at any point during the project;
- It protects you from financial losses in the event of bankruptcy;
- It safeguards you against ‘unknown’ costs, such as additional costs for electrical work or modifications to your home planned by the contractor; and
- Many times this document is required by law or banking institutions before issuing a loan or grant to cover some of the construction costs.
Why do I need one?
Even if you don’t plan on obtaining financing for your renovations, there’s really no reason not to get a performance bond – it could save you more than money! For example, if your contractor is going to be working in an area that has a higher risk of accidents (i.e., the bathroom), you might want to ask for this document so as to protect yourself from such risks.
The bottom line: always check with your financial institution when planning renovations and whether or not you need one of these documents. This will ensure that no hidden costs crop up later on in the process!
What can go wrong without one?
The fact of the matter is that many contractors who do not have experience think that they won’t need such protection. Many homeowners’ associations wait until it’s almost too late before calling for help – which means that damage might be irreparable and prevention impossible.
Theoretically speaking, the work will simply not be completed unless you go out of your way to enforce it. But if this is what you want…well, good luck with that! If that’s the case then I would say just let them do whatever they want and that’s that.
A performance bond ensures that nothing like this can happen – either the contractor does the job as agreed upon, or they cover any costs related to their failure to act.
What happens if a contractor doesn’t have one?
The fact of the matter is many contractors don’t bother with obtaining this document because it’s your obligation to make sure it exists! This means YOU will need to do all of the legwork required in order for things to run as planned.
In short, you might end up having to pay out of your own pocket because the contractor couldn’t be bothered with getting a performance bond.
How can I make sure that they have one?
Check beforehand – don’t wait until it’s too late! You can do this by going directly to a bonding company and requesting a copy of the document. The only thing left for you to do is sit back and relax while waiting for them to mail over the papers.
What are the advantages of getting a performance bond?
The advantages are numerous:
- Reputable contractors will not hesitate to present such documents as proof of their credibility and financial solidity;
- You don’t have to worry about making sure the contractor has one – it’s their job, so you should never have this on your mind! All you need to do is simply ask for it and you’re set; and
- At any point in time if things aren’t going as planned, then all you need to do is stop payment until the situation is resolved or until further notice from a court of law. This way, nothing like what I mentioned at the beginning can happen again. We’ve all heard stories about homeowners who were forced out of their homes because they couldn’t afford a construction company’s exorbitant fees, with little chance of returning to their properties.
The bottom line is that this bond protects you from any financial losses in the event of bankruptcy and safeguards you from “unknown” costs. Also, many times this document is required by law or banking institutions before issuing a loan for renovation purposes. Make sure that your contractor has one of these bonds before they start working and use it as a way to safeguard yourself against any unforeseen perils.