What is a Performance Bond?
Performance Bond Definition: A bond that guarantees the completion of a specific contract.
Performance bonds are a type of contract bond that guarantee that a contractor will adhere to the terms and conditions of a contract. Upon winning a bid (where a bid bond may have been required) and receiving a contract, contractors needs to submit this type of bond.
Usually, performance bonds and payment bonds are issued together as they are closely related.
Like all surety bonds, performance bonds act as a three-way agreement between the principal (contractor), the obligee (the government or a client) and the surety bond company providing the bond.
The performance bond is meant to protect the obligee in the case of principal default due to delays, inability to complete work on a project, or other performance issues.
In the case of a legitimate claim brought up against a contractor, the surety steps in and resolves the claim.
How Bid, Performance and Payment Bonds Work Together
Performance bonds are usually issued by the same surety bond company which underwrote the bid bond that the contractor used for their bid. This is meant to serve as a guarantee that a surety bond company will not underwrite a bid bond for a contractor for which it would not underwrite a performance or payment bond.
Once a contractor has won a bid, they usually have to obtain a performance bond in order to be able to begin work on a contract. Along with a performance bond, a payment bond is often also required by the obligee, though the need for a performance and payment bond always depends on the project’s contract and its terms and conditions.
While performance bonds guarantee a contractor’s performance, payment bonds guarantee that a contractor will pay all money that is due to subcontractors, laborers and material suppliers. This way, both sides that are working with the contractor are backed by a bond, and work on the project can commence.
What is the Cost of a Performance Bond?
The performance bond rates depend on the amount of the contract that has been awarded. For example, a contract could be in the amount of $250,000 and the performance bond for this contract will have to cover this sum.
But the cost of the performance bond that a contractor has to pay is only a fraction of the bond’s total amount - this is called the premium.
For bonds under $450,000 the amount of the premium on a bond is mostly determined on the basis of the personal credit score of the contractor. A contractor who has a good credit score will be offered a premium between 1%-3% of the total bond amount.
Performance bond requirements for larger bonds require other factors be taken into account when determining the cost. Things like personal and business financials, industry experience, and even the type of work that will be performed.
For larger performance bonds, premium is calculated on a sliding scale. Go to our 1 Million Dollar Bond Cost page for further explanation of what this means and a clear example.
Avoiding Bond Claims
Finding the right surety bond agency is crucial to receiving a good rate on your performance bond premium. But it is also important because working with a good agency is an additional guarantee, both for the obligee as well as for you.
By working with a professional surety bond company, you will know that you are backed by good security and that you will be offered help and support in case a claim is raised against you. Surety bond companies often help settle claims before they even arise so working with the right company is crucial.
For obligees it is also important that your surety bond company is a good one, because before issuing a bid, performance or payment bond, sureties usually assess a business very carefully and look into its financial records with great scrutiny. If after they have assessed the business they issue a bond, this signals that the business is financially stable and reliable.
By applying with Bryant Surety Bonds you will have access to exclusive rates in all 50 states, offered by our partner network of A-rated, T-listed surety bond companies. This way you will receive the best and lowest possible rate on your performance bond by an expert surety bond company.
How to Get Your Performance Bond
To apply for a performance bond, you simply need to complete the online application form. Your submission will be reviewed and we will contact you with your bond quote.
If you have additional questions, or need help applying for your performance bond, simply call us at 866.450.3412 to receive support from one of our surety bonds experts.
