What You Need To Know About Getting A Performance Bond

Performance Bonds can help your construction company grow with confidence.

If your construction company is expected to provide a performance bond as part of a project, that’s good. It means you have won a bid and are preparing to start a job.

When your company starts bidding on projects for cities, states, municipalities, or even general contractors, you’ll be expected to guarantee that your company can meet the obligations detailed in the contract. Not only does the performance bond guarantee your ‘performance’ on the job, but also that your company can pay for losses if you deviate from the contract.

This assurance comes in the form of surety bonds. Basically, a surety company guarantees the contractor’s performance.

(Fun Fact: any federal government construction project that exceeds $100,000 is required to have a performance bond. Such requirements differ between state and local municipalities. We’ve known local cities that require contract bonds on projects as low as $20,000).

Allow us to get a little technical momentarily (we apologize, but it helps us know the terminology). In this arrangement, the contractor is known as the “principal,” the “obligee” is the client (the one who receives the obligation), and the “surety” is the organization that ensures the principal’s obligation.

Surety companies have the assets necessary to pay the obligee if the principal can’t fulfill the contract’s obligations. You may have heard of some of the top surety companies, such as Developers Surety and Indemnity Company, Old Republic Surety, Suretec, American Contractors Indemnity Company, etc… Don’t worry if these names are unfamiliar. You won’t be dealing with these guys anyway. Surety companies don’t work directly with contractors. Instead, they partner with brokerages or insurance agencies, like Fusco & Orsini.

The obligees typically require several kinds of bonds from companies bidding on large-scale projects. These bonds include Bid Bonds, Performance Bonds, Payment Bonds, Maintenance Bonds, and Subdivision Bonds, all of which fall under the ‘contract bonding’ category.  Some bonds are required at different stages of a contract; for example, bid bonds are due at the time of bidding, and performance/payments bonds are due when the project begins.

These bonds go hand in hand. If a government agency is looking for one of these bonds from its bidders, it’s probably looking for most of the others, too.

Let’s look a little closer at performance bonds.

A performance bond guarantees that the contractor performs the services described in the contract. If, for instance, the contractor wins a bid to build a new public library, the performance bond would ensure that the library appears on schedule and meets the promised specifications.

If the contractor doesn’t complete the performance or the work is not up to the promised quality, the client (obligee) can claim against the surety company that issued the bond. The surety company will investigate, and if they find that the contractor did fail to perform, they will award damages to the obligee commiserate with the cost of the contractor’s failure.

Of course, the contractor doesn’t get off scot-free. They will then have to pay the surety company back in full.

The cost of a performance bond depends on various factors, including the scope of the contract and the principal’s creditworthiness (the surety company wants to ensure that the principal can pay back the bond amount if necessary).

To get a performance bond, contractors usually pay a premium on the bond amount and interest on the bond. Again, the price will depend on the bond’s cost and the principal’s risk (creditworthiness).

In most cases, you must obtain a bid bond before bidding on a project. Only after winning the project will you need to pick up a performance bond.

Even though all this may sound complicated, surety bonds, including performance bonds, are not too difficult to get. At Fusco & Orsini, we’d happily answer any questions about surety bonds and walk you through the application process. 

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