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Performance Bonds

What are Performance Bonds?

 

Performance Bonds are a type of Contract Bond. Performance Bonds guarantee that a contract will be completed according to the terms of that contract including the agreed upon contract price. In other words, they guarantee the the contractor will "perform" the contract.
Performance bonds are a three party agreement. The Principal is the party is fulfilling the contract. This is usually a Contractor. The party that is receiving the benefit of the bond is referrred to as the Obligee. This is usually The project owner or upstream contractor. The Surety is the third party that is guaranteeing the Principal's performance. This is the bond company.
Performance Bonds - This shows the parties to a performance bond and the responsibilities of the Principal, Obligee and Surety Bond company. Background is a white block wall.

 

Why Am I Being Asked For a Performance Bond?

 

Performance Bonds are required on Federal Projects of $150,000 and above by The Miller Act. Many states and municipalities have adopted similar requirements referred to as "Little Miller Acts". Owners and lenders on private projects may also require Performance Bonds as a means of ensuring that a project is completed on budget. General Contractors and other contractors may also require Performance Bonds from subcontractors as a way to mage risk on their projects. These are sometimes referred to as Subcontract Bonds.

Amount of Performance Bonds

It is standard for a performance bond to be written for 100% of the contract amount. In other words, if the underlying contract is $1 million, the performance bond is usually also $1 million. There are exceptions to this rule. Some Obligees require larger sums such as 120% of the underlying contract amount. Others, require a lesser amount such as 50% of the contract amount. Beware of these deviations from the normal though. Principals and Obligees are both often disappointed to discover that the bond company still charges for 100% of the contract amount, even when a lesser amount is required.

How to Obtain a Performance Bond

 

Performance Bonds are easily obtainable for most contractors. For simple projects of $1,000,000 or less in value, a simple credit check is all that is needed. These performance bonds can be issued in mintues by clicking here or the button below:
Instantly Purchase a Performance Bond Button. Green background with a white key and white text
For larger projects, more information may be required such as business and personal financial statements. Surety Bond underwriters write large performance Bond based on "The 3 C's", which are Credit, Capacity, and Character. In short, they want to make sure that a contractor has the financial strength, experience, and systems in place to complete their projects.

Steps to Obtaining a Performance Bond - This graphic shows the two easy ways for contractors to obtain Performance Bonds

Performance Bond Costs

 

Performance Bond costs are based on the financial strength and capabilities of the Principal. In general a range is somewhere between 0.3% - 3%. Usually performance bond rates are on a sliding scale meaning the rate decreases as the project gets larger. However, flat rates are not uncommon. Other factors may also increase the rate such as design-build projects, extended maintenance periods or long project durations. It is important to note that if a Performance Bond is written with a Payment Bond, there is only one charge and not a charge for each bond separately. You can read more about the cost of Performance Bonds and how to get better rates here.
Performance Bonds Costs - This graphic shows the cost of a performance bond in a green text box. The background is a group of buildings under construction.

Can A Performance Bond Be Cancelled?

 

No. Performance Bonds cannot be cancelled once they are issued. Performance Bonds guarantee an underlying contract. Therefore, the contact must be completed, cancelled or terminated and the performance bond will follow suit. An exception to this rule is if the Obligee is willing to return all original performance bonds before the contract is started.

 

Can Performance Bonds Be Transferred?

 

No. Performance Bonds are underwritten by surety bond companies based on the financial strength and perceived ability of the Principal and other indmenitors. Therefore, they will not transfer the obligation to others. The Principal may subcontract their obligation to others but the Principal and Indemnitors are responsible for the obligation until the contract is complete and any warranty or maintenance period has expired. This can be a significant consideration for Principals when selling their business.

 

When Are Performance Bonds Released?

 

A Performance Bond guarantees an underlying contract. A performance bond is not released like a letter of credit. Once the contract is complete and any warranty or maintenance period has passed, the performance bond’s obligation is finished. There is no need to get the performance bond back from the Obligee or close it out. Generally, the surety bond company will send Contract Status Report requests to the Obligee to know when the contract has been completed and when the maintenance period has started.

 

How Long Does It Take To Get A Performance Bond?

 

Small bonds under $1,000,000 can be approved and issued in a matter of minutes for those Principals with good credit. Click here to get one in minutes.

 

 

Instantly Purchase a Performance Bond Button. Green with a white key.

 

 

For larger performance bonds or bond programs, we need to collect underwriting information including financial statements on the company, personal financial statement(s) on the owner(s), an application, bank information, etc. Once we receive this information, we can typically have a Performance Bond Program or approval set up within 24 hours. More difficult circumstances may require longer lead times. For example, a contractor utilizing the SBA Bond Guarantee Program should expect a few days for approval.

 

Where Do You Find Performance Bonds?

 

In the United States, Performance Bonds can only be written by licensed property and casualty insurance agents. Although many insurance agents can sell surety products, most do not have the expertise or proper surety bond company access to do so. Agents then must be appointed with licensed surety bond companies.

Unfortunately, fraud exists in performance bonds. Customers should verify that they are getting a surety bond that is highly rated by a service such as A.M. Best and list in the U.S. Treasury Circular 570 in most cases and always on Federal projects. Avoid buying “Individual Performance Bonds”. These are performance bonds that are not backed by a Corporate Surety Bond Company. They are often fraudulent and do not satisfy the requirements of many contracts.

 

What Is A Power Of Attorney And Seal On A Performance Bond?

 

Performance Bonds are original, legal documents. Instead of processing performance bonds directly, many surety bond companies appoint approved bond brokers and give them the authority to sign on their behalf. This is referred to as a Power of Attorney. For the performance bond to be valid, it needs to be signed by an individual listed on the surety bond company’s Power of Attorney and the surety bond company’s seal must be on the performance bond.

 

Is an Electronic Seal Valid?

 

The answer is Yes as long as a surety bond company has given the broker permission to use an electronic seal. However, the Obligee must still accept an electronic seal. Many Obligees have adopted practices allowing these electronic seals but some still require a “wet seal” from the broker.

 

Does The SBA Write Performance Bonds?

 

The SBA has a program for Performance Bonds. However, the SBA is not a directly writer of Performance Bonds. Instead, the SBA provides incentives for surety bond companies to write bonds for Principals that may not otherwise qualify.  The SBA does this by providing reimbursement to surety bond companies if they suffer a loss on an approved account. These reimbursement guarantees range from 80%-90% of each Performance Bond written, depending on the status of the contractor. In return the SBA collects a fee for this guarantee which is currently 0.6% of the contract price. Learn more about the SBA Surety Bond Guarantee Program here.

 

Can I Get A Performance Bond After A Bankruptcy?

 

Typically, yes if the bankruptcy is completed and discharged. A contractor that has filed a recent bankruptcy may have to use the SBA Surety Bond Guarantee Program discussed above and/or use other surety bond assistance such as funds control or collateral. The contractor should also expect to pay a higher performance bond cost.

 

Are Performance Bonds Insurance?

 

No. Although they are often written by insurance companies and insurance agents, Performance Bonds are very different from insurance. Performance Bond resembles a credit product and underwriting assumes that the surety bond company will not suffer a loss. Performance Bonds always require indemnity. This means that if the surety bond company suffers a loss, they will seek reimbursement from the Principal and Indemnitors. On the other hand, insurance is written with the expectation of losses. The insured is only responsible for a portion of the loss through deductibles and coinsurance.

 

 

Performance Bonds Compared to Insurance - Chart shows the differneces between performance bonds and insurance. The background is a building being framed with wood.

 

 

Do I Have To Personally Guarantee A Performance Bond?

 

Most surety bond companies require personal indemnity on all shareholders with more than 15% ownership. This means that the owners put their personal assets at risk in return for bonding support. Since surety is essentially a credit product, they expect the owner(s) to stand behind the company personally. However, some surety bond companies will agree to waive personal indemnity for Principal’s with strong balance sheets and good experience. The requirements for these waivers vary by surety bond company.You can read more about personal indemnity here.

 

Why Does My Spouse Have To Sign For Performance Bonds?

 

This is common in credit relationships. If there was a claim, a surety bond company does not want to argue over which assets belong to the Owner and which belong to their spouse. This is also a means of ensuring that Corporate assets are not shielded by transferring them to the spouse. Surety Bond companies are very reluctant to provide a waiver of spousal indemnity if the other spouse is signing. They may be willing to exclude certain assets in writing if it makes sense. You can read more about indemnity here.

 

Performance Bonds Vs Letters Of Credit And Bank Guarantees

 

Performance Bonds are typically unsecured credit. Most surety bond companies do not file liens against assets unless the contractor is in a claim situation. Also, surety bond companies must investigate performance bond claims and be careful to pay only if the claim is found to be valid. On the other hand, letters of credit are typically secured by assets and receivables. They are also usually “irrevocable”, meaning that once committed, there is very little protection for the person posting the letter. You can read more about the advantages and disadvantages of surety bonds versus bank lines of credit here.

 

Performance Bonds vs. Letters of Credit - This tables shows the difference between Performance Bonds and Letters of Credit. Its a blue and green table with scale at the bottom. There is a weight with Performance Bonds on one side and LOC on the other. The background is a construction crew working on a building.

 

Can I Get A Performance Bond With Bad Credit?

 

Yes. Companies with solid financial strength and experience can still get performance bonds with bad credit. The reasoning for the credit issues will need to be disclosed and usually the expectation is that there will be a plan to correct things moving forward. Even without strong financial strength, there are tools to help get performance bonds. These include the SBA Surety Bond Guarantee Program, collateral, funds control and other tools to make getting performance bonds easier.

 

How Do I Get A Refund On A Performance Bond?

 

Typically to get your performance bond premium refunded, you need to return the original performance bond to us. Performance bonds premium cannot be refunded off copies alone because they are legal documents that are by nature non-cancellable. Also, the performance bond must be returned before the project starts or at least very early on in the project before much work has taken place.

 

What Is A Performance Bond Overrun?

 

Performance Bonds guarantee a contract and these bonds are invoiced based on the amount of the underlying contract. In many cases, the contract amount changes throughout the life of the project. An increase in the contract amount will lead to an overrun which means the surety bond company is entitled to additional premium. A project decrease would result in an underrun which means the surety bond company owes you a refund of some of the bond premium.

 

Performance Bond versus A Payment Bond?

 

A Performance Bond guarantees that an obligation will be completed according to the contract. A Payment Bond guarantees that subcontractors and suppliers will be paid on the project and therefore be lien free. Another way to say this is that a Performance Bond guarantees that a project will be completed for an agreed amount. On the other hand, a payment bond guarantees that the bills will be paid.  A Performance Bond can be written by itself but is often written with a Payment Bond. There is no additional charge when the two surety bonds are written together. Read more about the differences between these two bonds here.

 

Are There Differences In Performance Bond Companies?

 

Yes. There are many different companies that write Performance Bonds. Each company has their own underwriting appetite. Some companies prefer net worth, while some prefer working capital. Some concentrate on Fortune 500 companies, while some look for small and mid-sized businesses. Also, different surety bond companies have different financial strengths which determines their ability to write performance bonds. Having a variety of surety bond companies writing Performance Bonds is a good thing for contractors. It ensures there are solutions for all types of situations.

 

What Is A Performance Bond Treasury Listing?

 

The U.S. Federal Government maintains a list of surety bond companies who they approve of doing business with. This list is the Treasury Department’s 570 Circular. This is sometimes referred to as a “T-Listing”. The list also gives the largest performance bond amount each surety bond company can write to the Federal Government. Often, surety bond companies have agreements with re-insurers or other surety bond companies if the project is larger than their Treasury Listing. You can check your company’s T-Listing here.

 

What Is Performance Bond Capacity?

 

Surety Bond Capacity refers to the total surety bond credit that a surety bond company extends to the Contractor (Principal). Although many factors are considered, typically surety bond capacity is a multiple of analyzed working capital and/or net worth. Surety bond capacity can be both “bonded” and “total”. Bonded is of course the amount of bonded work a surety company will support. Total is the most work a surety company will support for a Principal regardless of whether the work is bonded or unbonded.

 

Bid Bond Vs. Performance Bond

 

Although these are both types of Contract Surety Bonds, they are not the same thing. A Bid Bond guarantees that a Contractor will enter a contract at the bid price, and if asked, provide a performance and payment bond. Performance Bonds guarantee the completion of a project after the Principal has bid or negotiated it. A Performance Bond is regularly issued after using a Bid Bond on a project. However, a bid bond is not required to issue a performance bond. You can read more about Bid Bonds here.

 

Performance Bond vs. Bid Bond - This chart shows four differences between Performance Bonds and Bid Bonds. The background is a construction site at sunrise.

 

There are many other questions that could arise regarding performance bonds. We will keep updating our list as questions come in. Our surety bond experts are available to answer your questions anytime. Contact us today.