How Do Performance Bonds Work?

A performance bond involves three parties:

• Principal: The contractor or subcontractor responsible for completing the project.

• Obligee: The project owner or developer who requires the bond.

• Surety: The company providing the performance bond, which guarantees the contractor’s obligations.

If the contractor fails to fulfill the contract, the surety steps in to ensure the completion of the project. This may involve hiring another contractor or compensating the project owner for losses incurred.

For more information, visit How Does a Performance Bond Work in Construction?

What Do Performance Bonds Cost?

The cost of a performance bond typically ranges from 0.5% to 3% of the contract amount. In most cases, contractors pay between 1% and 2%. The exact cost depends on several factors:

• The contractor’s financial strength and credit score.

• The size and complexity of the project.

• Contract length and warranty period.

Learn more at Performance Bond Costs.

Who Pays for a Performance Bond?

The principal (contractor) is responsible for paying for the performance bond. However, most contractors include the cost of the bond in their project bid, passing it indirectly to the obligee (project owner).

Some obligees may reimburse the bond cost directly, while others require contractors to account for it in their bids. It’s essential to carefully read the project specifications to understand how the cost should be included.

How Do You Get a Performance Bond?

Securing a performance bond involves the following steps:

1. Submit an Application:

   • Complete an online application or print and email one.

   • For bonds under $750,000, a credit check is usually sufficient.

2. Provide Financial Documentation:

   • For larger bonds, additional documentation like personal and company financial statements is often required.

3. Approval and Issuance:

   • Once the application is reviewed and approved, the bond is issued.

Swiftbonds works with leading surety companies to help contractors secure bonds quickly and affordably. Learn more at How Do You Get a Performance Bond for a Business?

What Is the Difference Between a Performance Bond and a Payment Bond?

Performance bonds and payment bonds are often issued together, but they serve different purposes:

• Performance Bond: Ensures the contractor completes the project as per the contract.

• Payment Bond: Guarantees that subcontractors and suppliers are paid for their work and materials.

On public projects, payment bonds are critical because subcontractors and suppliers cannot file mechanic’s liens. Private projects also use them to prevent liens.

When both bonds are issued together, the obligee gets 200% coverage—100% for performance and 100% for payments—all for the price of one bond.

Learn more at What Is a Payment Bond?

Are Performance Bonds Insurance?

Although performance bonds are often written by insurance companies, they are not insurance. Key differences include:

1. Structure:

   • Performance bonds are three-party agreements between the principal, obligee, and surety.

   • Insurance is a two-party agreement where the insured is the beneficiary.

2. Claims:

   • If a claim occurs, the principal must indemnify the surety for any losses.

   • In contrast, insurance transfers the risk to the insurance company.

For more, read Performance Bonds vs. Insurance.

Differences Between Performance Bonds and Bank Letters of Credit

Performance Bonds:

• Cost: 0.5%–3% of the contract value.

• Not collateralized, leaving the contractor’s assets free for other uses.

• Claims require investigation by the surety before payment.

Bank Letters of Credit:

• Typically collateralized, tying up the contractor’s assets.

• Cost is tied to interest rates and can fluctuate.

• Funds are paid on demand, without investigation.

Learn more at What Is the Difference Between a Surety Bond and a Collateral?

How Do You Get a Two Percent (2%) Performance Bond?

To get a performance bond with a 2% premium, contractors need strong financial credentials, such as:

• High credit scores.

• Stable financial statements.

• A solid track record of successful projects.

Swiftbonds can help negotiate the best rates for contractors by working with top surety companies. Start the process today with Swiftbonds’ Performance Bond Application.

Why Do You Need a Performance Bond?

Performance bonds protect project owners from financial losses due to contractor default, delays, or substandard work. They are required on federal projects over $150,000 under the Miller Act and by many states under their “Little Miller Acts.”

They can also be required by:

• Private project owners.

• Developers.

• Lenders.

• Other contractors.

Conclusion

Performance bonds are essential for ensuring the completion of construction projects and protecting project owners from potential risks. Whether you’re a contractor looking to secure a bond or a project owner seeking protection, performance bonds provide financial security and peace of mind.

For more information, visit:

• What Is Cost of a Construction Performance Bond?

• Maintenance Bonds and Construction Warranty Bonds

• How Does a Performance Bond Work in Construction?

Ensure your project’s success by securing the right bond today!