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Information Technology Performance Bonds

June 14, 2022

Performance Bonds for Information Technology 

 

Performance Bonds are often required for Information Technology (IT) companies as well. Learn more about these unique Performance Bonds and how they are unique.

 

What is a Performance Bond for IT?

 

A performance bond for IT guarantees that an IT Company will deliver a product and/or service to a buyer for a set price and according to a contract.

 

An IT Performance Bond is a three party agreement. The IT Company is the Principal on the bond that is guaranteeing the fulfillment of the contract. The Obligee is The Project Owner that is receiving the product and benefitting from the bond's guarantees. The Surety is the third party bond company that is guaranteeing the IT Company's performance of the contract.

 

IT Performance Bond Underwriting Considerations

 

IT Performance Bonds are very unique. They are considered a type of Service Contract. Below are things surety bond underwriters evaluate when writing these bonds.

 

This is 5 computer graphics in different colors. On each computer screen is an underwriting consideration for IT Performance Bonds

 

Uniqueness

 

A Surety Bond Company writing Performance Bonds for an IT Company is very concerned about the uniqueness of the product or service being guaranteed by the contract. If the IT Company cannot complete the contract, the Surety bond company must find a replacement contractor to fulfill the obligation. 

 

If the product or service is unique to that IT Company, finding a replacement may be impossible and cause the bond company to forfeit the entire Performance Bond penalty.

 

Therefore, surety bond companies will have higher underwriting requirements for unique contracts as opposed to IT contracts with multiple competitors with similar products and services.

 

Completion Time

 

Another major underwriting factor for IT Performance Bonds is the length of the contract. In general, surety bond companies do not like long term contracts. If a contract is to be longer than 2 years, it may be better to separate the obligation. 

 

For example, if an owner wants the install of equipment with a 5 year service agreement, a Surety bond company would prefer the performance bond to cover the install with 2 years of service and have the remaining three years covered by a separate service contract.

 

A second option would be to write a contract that gives an additional 3 years of service under the performance bond, but with annual renewal options by all parties. This is common in service contracts.

 

Service Only Contracts

 

Some IT Contracts are written for service only. For example, a contractor may be written with an owner to service their IT needs for a 5 year period. In this case, a Surety bond company will want to make sure the IT Company has the labor in place to handle the service needs over that period.

 

Supply Chain

 

In recent years, the supply chain for technology products has become more difficult. With many components being made internationally, surety bond underwriters will want to know if the IT companies have the products and materials it needs to complete the contract. 

 

If not, how confident is the company that it can get the product for the price estimated in the contract.

 

Financial Strength

 

IT companies must also have the financial strength to qualify for a Performance Bond. Surety bond companies will evaluate the IT Companies working capital, net worth, profitability and debt to see if they qualify for the performance bond.

 

Experience 

 

A surety bond company also wants to make sure the IT Company has the experience to complete the contract. They will look at the size and types of contracts completed by the IT Company in the past. 

 

Generally, the Surety bond companies do not want to write performance bonds that are more than twice as large as a company's largest completed project.

 

What Do IT Performance Bonds Cost?

 

IT Performance Bonds Cost between 0.5% and 3% of the contract amount. The cost depends on the financial strength of the IT Company and the Surety Bond company's filed rates for the state that the work is being done.

 

Unlike other Performance Bonds, IT Bonds may have the bond premium due annually. This depends on the contract. If the contract is for ongoing services, the bond premium will be due annually. You can read more about Performance Bond Costs here.

 

This is a box showing the cost of IT Performance Bonds. The background is green computer code.

 

Indemnity on IT Performance Bonds 

 

Like all Performance Bonds, IT Performance Bonds require Indemnity. That means that if the surety bond company suffers a valid loss, they will seek to be reimbursed from the IT Company and any other indemnitors through the indemnity agreement. You can read more about indemnity here.

 

Other IT Bonds May be Needed

 

IT Companies may need other bonds in addition to Performance Bonds such as Bid Bonds, Maintenance Bonds and License Bonds. Many of the license Bonds can be purchased instantly here.

 

IT Performance Bonds can be complicated but the experts at Axcess Surety are standing by to make bonding easy. Contact us anytime. IT Companies can also visit our Learn Page and Surety Bond FAQs to learn more about surety bonds. Companies can also learn more about Performance Bonds by watching this video.

 

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