What Amount is Insured by a Performance Bond?

A performance bond typically insures up to 100% of the total contract value. This guarantees that the project owner (the obligee) will be compensated if the contractor (the principal) fails to complete their obligations under the contract. For example, if a contractor abandons a project or delivers subpar work, the bond ensures that the owner has funds to cover the costs of hiring another contractor or fixing the issues.

What is a Performance Bond?

A performance bond is a surety bond that guarantees a contractor will complete a project according to the agreed terms, within budget, and on schedule. The bond protects the project owner from potential financial losses resulting from the contractor’s default or non-performance.

Performance bonds are widely used in construction and other industries requiring large-scale projects. They are particularly common for public works contracts, where financial security is essential for ensuring project completion.

Learn more about performance bonds here.

What Amount is Typically Covered?

100% of Contract Value: Most performance bonds insure the full amount of the contract, ensuring the obligee has sufficient funds to complete the project if the contractor defaults.
Partial Coverage: In some cases, performance bonds may cover a lesser percentage, such as 10% or 50%, depending on the specific contract requirements or risk factors. For example:
- 10% Bond: Guarantees 10% of the contract's value.
- 50% Bond: Guarantees 50% of the contract's value.

Even for partial coverage, the cost of the bond is often calculated as a percentage of the total contract value.

Example Calculation for a $1 Million Contract:

100% Bond Coverage: Insures $1,000,000.
50% Bond Coverage: Insures $500,000.
10% Bond Coverage: Insures $100,000.

Learn more about how performance bond costs are calculated.

What Does a Performance Bond Cover?

Performance bonds provide financial protection to the obligee by covering:

Completion Costs: Hiring a new contractor to finish the project.
Defects and Repairs: Correcting work that does not meet contract standards.
Project Delays: Financial losses resulting from delays caused by contractor non-performance.

Example: If a contractor abandons a $500,000 project midway, a 100% performance bond ensures the obligee has $500,000 to hire another contractor and complete the work.

Who is the Beneficiary of a Performance Bond?

The obligee is the beneficiary of a performance bond. This is typically:

The project owner for construction projects.
A government agency for public contracts.

The obligee is protected from financial loss, while the contractor is held accountable for fulfilling the contract.

Learn more about who pays for a performance bond.

What Percentage is a Performance Bond?

Most performance bonds cover 100% of the contract value, but some can cover less. The coverage percentage depends on the specific requirements outlined in the contract.

Typical Coverage: 100% of the contract amount.
Partial Coverage Options: 10%, 50%, or custom percentages, depending on the terms.

Regardless of the percentage, the cost of the bond is often calculated as a percentage of the total contract value.

Are Performance Bonds Refundable?

In certain circumstances, performance bonds can be refunded:

Unused Bonds: If the bond is never submitted to the obligee.
Cancellation: If the bond is canceled before the project starts or within the first term.

Partial Refunds: Some sureties offer prorated refunds for canceled bonds during the renewal period.

Frequently Asked Questions About Performance Bonds

What is a 10% Performance Bond?

A 10% performance bond covers 10% of the contract’s value. While this provides partial protection, many obligees prefer 100% coverage to fully safeguard their interests.

What is a 50% Performance Bond?

A 50% performance bond guarantees half of the contract’s value, offering moderate protection in case of contractor default.

What Does It Mean to Release a Performance Bond?

A performance bond is released when the project is completed, and all obligations have been met. This ensures the contractor fulfilled their commitments, and the obligee no longer requires financial protection.

Learn more about releasing performance bonds.

How Do You Collect on a Performance Bond?

To collect on a performance bond:

Notify the surety company of the contractor’s default.
Provide evidence of non-performance or breach of contract.
The surety investigates and compensates the obligee as per the bond terms.

Conclusion

A performance bond typically covers 100% of the contract value, ensuring financial security for the obligee. Partial coverage options, such as 10% or 50% bonds, are available but less common. The exact amount insured depends on the contract terms, the contractor’s financial history, and the project’s complexity.

To secure a performance bond or learn more, contact Swiftbonds.