Performance bonds are described as guarantees from bonding companies that specific job types are completed within the specifications laid out in a contract. A performance bond is very different to insurance in the way that a bonding company does not issue a check when one defaults on a particular job. If a contractor is not able to complete the task in the given time, a bonding company can put out this job on a bid to selected contractors. In some instances the bonding company will even take the task of finishing the job themselves.
The requirements related to performance bonds have been put into place by what is known as the Miller Act that is associated with all the public work based contracts of $100,000 and more. There are also bonds available for general contractors that they ask from the subcontractors they use or for private work. If claims get filed on the contractor’s performance surety-bond they hold the responsibility of paying back a bonding company.
The Costs Involved in Performance Bonds
Performance bonds costs are related to a percentage of the entire contract amount. The bigger contracts usually have a premium of about 1%, while the smaller contracts necessitate less underwriting requirements but are typically priced higher around 3%. The payment and performance bond costs must be included on the bid that will mean that the contractor does not have to pay for the bond but rather pass the costs onto the owner.
Performance Bond Rates
A percentage of a contract amount that the contractor is asked to pay is more commonly known as the rate. This can differ as well as affect the bonding costs dependent on which state and the line-of-work the contractor is in. The surety businesses will file various “base performance” bond rates for every state, dependent on the work type that requires bonding. These can include architectural construction, concrete work and engineering excavation and construction. The rates are typically similar across the different surety companies. However, there are a few exceptions due to the fact that the surety businesses will have a different appetite when it comes to bonding specific trades.
The contractors personal credit is used by the surety company in association to considering the contractor for performance bonds as well as deciding on the rate. However, the business financials of the contractor is the most vital portion that the surety company will review. If the contractor is able to demonstrate a good financial strength in the way of offering good business financials they can enjoy a significantly lower rate on the performance bond they receive.
If a contractor requires performance bonds and payment on a specific job they have to apply in order to assess whether they actually qualify for such bonding. Contractors need to be aware of the fact that certain items will be required when looking for approval on the construction based performance bonds. The paper work involved when submitting the contractor’s business financials must include a cash-flow statement, complete disclosures/notes, work schedules, income statement and a balance sheet.