Performance and Payment Bonds 101

Are you interested in establishing your own contracting company, or perhaps already have one but you’ve just stumbled upon a new requirement called a surety bond? If you have already done a little research, you might have gotten a pulsating headache trying to understand what that means for your business. But don’t go reaching for the aspirin just yet. The process doesn’t have to be long and troublesome. Just take a step-by-step approach and you will see that everything fits logically in its place. In this article I will try to give you a hand with the kind of surety bonds most contractors need – performance and payment bonds.

What exactly are performance and payment bonds?

Most contracting businesses need to buy performance and payment bonds, types of contract bonds, which sometimes go together under one name – “performance and payment bonds”. Simply put, a performance bond is a guarantee on your part that you will follow all parts of the agreement. If you are planning on taking part in a public work project (and you should), the Miller Act of 1932 requires you to buy a performance bond for every construction contract, signed by the federal government. Different states have also put in place similar requirements for state funded projects. Payment bonds, on the other hand, are there to protect everyone that you collaborate with on a project – they make sure you will pay all your suppliers, subcontractors, laborers, etc. Generally, they are required for contracts exceeding $30,000.

A word for those bidding on public work contracting projects. At the very beginning of the bid you will also need a third kind of bond, called a bid bond. A bid bond guarantees that, should you win in the bidding, you will execute the contract at the price you offered. It doesn’t oblige you to take up the contract in case you get selected, but if you choose not to do it, you lose what you paid for the bond.

How do you get a performance and payment bond?

Now onto the good news. Performance and payment bonds are not hard to get. In fact, you can go through the whole process of getting quotes, approval and payment through a surety bond agency’s website. The price your business will have to pay is a percentage of the whole contract cost and it depends on a variety of factors. Typically companies with higher net profits will get a reduction in the price of the surety bond. The assumption behind this is that if you have more profit, perhaps you have been trusted more times by previous clients. What clients owe you, but you haven’t received yet, doesn’t count as profit, so hurry and up and collect all overdue payments.

Another good thing about bidding on public projects is that some states will let you get away with paying for the bond. What you do is add the price of the bond towards the whole cost of the project and then submit your bid. The government doesn’t mind because they want to be careful about how they spend public money.

Price, naturally, also depends on your credit score. Think of performance and payment bonds as more of a credit than an insurance. For projects under $300k, how much you pay depends solely on your personal credit score. For larger projects, pricing is somewhat longer and more extensive but there are a few ways you can save money along the way. If you need further assistance, get in touch with us and we’ll gladly explain the whole process.