Solar Performance Bonds are often needed on Solar Projects. The value of solar projects in the U.S. for 2021 was $33,000,000,000. With significant escalations in the price of fossil fuels, the demand for solar projects should only continue to increase. Contractors who can obtain Construction Bonds such as Performance Bonds will be positioned to acquire much of this work. Learn more about what makes bonding Solar Projects unique and how to obtain Performance Bonds on these projects.
A Solar Construction Project is the building of any system that converts sunlight into a usable form of energy such as electricity or thermal energy. This process is usually accomplished by installing photovoltaic (PV) panels or through Concentrated Solar Mirrors. Solar construction projects can include solar fields and even panels on a commercial or residential building.
A Solar Performance Bond guarantees that a solar construction project will be completed according to the underlying contract and at the contract price. A Solar Performance Bond provides valuable protection to the owner of a solar project. Not only does it make sure their project will be completed, but it also ensures that the project does not go over budget, even if the price of labor or material increases.
If the contractor cannot complete the project, the owner can make a claim against the Solar Performance Bond. The Surety Bond Company writing the bond will then have to complete the project, or provide capital for another contractor to complete the project.
A Solar Performance Bond is a three-party agreement between the Solar Contractor (the principal), the Project Owner (the obligee) and a Bond Company (Surety). The Owner must require the Solar Contractor to provide a Performance Bond. The Solar Contractor then must be qualified by a Surety Bond Company. This company makes sure the Solar Contractor has the experience, and financial strength to complete the solar project. If the Surety Bond Company approves the solar contractor, they issue a performance bond on the project in exchange for payment from the solar contractor. The Performance Bond lists the project and the Project Owner. The Surety Bond company is then responsible if the Solar Contractor cannot complete the project.
Solar Contract Performance Bonds are unique and not every surety bond company is comfortable providing these bonds. The following are some unique considerations and ways to make obtaining a Solar Performance Bond easier.
Project Owners often want efficiency guarantees that guarantee a certain amount of energy production on their solar construction project. This is an understandable request given the capital investment required on some solar projects. However, Performance Bonds are not meant for this purpose.
Performance Bonds are meant to guarantee the construction phase only. Bond companies do not want to be in the business of underwriting a product’s capabilities. Therefore, solar projects that need a performance bond, need to specifically exclude these efficiency or performance guarantees from the Performance Bond. The Performance Bond Form and Contract should specifically state language that excludes these guarantees. An example clause would be:
“The Performance Bond guarantee applies only to the project construction and specifically excludes all guarantees of efficiency, energy production, and performance specifications.”
There are some ways to provide Efficiency Guarantees. Often the best source is the manufacturer of the equipment.
Although Performance Bonds should specifically exclude Efficiency Guarantees, there are some insurance companies providing this coverage. If a Project Owner would like an Efficiency Guarantee, a contractor should look into purchasing this coverage. Axcess Surety can put programs together for those looking to guarantee efficiency or output through highly rated insurance carriers. We also can offer PV Warranty Insurance for those involved in the sales of manufacture of solar panels.
Another consideration for writing Solar Performance Bonds is the project’s warranty period. Some solar contracts call for a warranty of 20 years on the solar panels. Performance Bonds are not meant to cover long term warranties. Most surety bond companies are uncomfortable covering warranty periods longer than 2 years. Even the strongest contractors can typically negotiate a 5 year bonded warranty at most.
Instead, solar contractors should pass the long term panel warranty back to the solar panel manufacturer. This is common practice in solar construction contracts. Any other warranty provided should be covered by an insurance policy and not a performance bond.
Some solar construction projects require the contractor to own the project until the construction is complete and can be turned over to the owner. These types of contracts are common when building a solar power plant for a city or municipality.
Unfortunately, these types of projects are riskier for the solar contractor and the surety bond company. These projects turn the contractor into a developer. The reason these are considered risky bonds is that the contractor must typically finance the whole project and does not get progress payments like they would in a normal construction contract. Even if the Solar Contractor never collects a dollar from the Owner, the Performance Bond guarantees the project’s completion.
Solar contractors will need to be financially sound to qualify for performance bonds in this scenario. They will need to show that they either have the cash on hand to complete the whole project, or that they have obtained financing from a lender and that those funds have been set aside for the project.
Some Solar Construction Projects qualify for tax credits from Federal and State Governments, municipalities and even utility companies. Contractors may be tempted to negotiate ownership of these credits as a way to decrease their bids and win the project.
However, Surety Bond Companies frown on this practice. Obtaining credits can be time consuming and often cannot be obtained until a project is complete and operational. This does not help a contractor with cash flow during the project and could contribute to a bond claim. Further, legislation and credits can change, leading a contractor to lose money on the project. Contractors wanting a performance bond on a project should bid it with profit and look at any tax credits as a bonus.
When a solar performance bond is required on a project, a payment bond is usually required as well. A payment bond guarantees that the Solar Contractor pays their subcontractors and materials suppliers so that a mechanic’s lien is not filed on the project.
Payment Bonds are required on most Federal projects by The Miller Act and most states and municipalities have similar requirements.
Solar Performance Bonds cost between 0.5% – 3% of the contract amount. This cost depends on the Solar Contractor’s financial strength and experience, along with the surety bond company’s filed rates in the state where the project is built. Additionally, other factors such as Design Build Contracts or long term warranties can affect the pricing of these bonds. You can read more about Performance Bond Costs and how to reduce them here.
Adding a payment bond does not cost extra if a performance bond is issued. There is only one charge for both bonds.
Solar contractors can obtain smaller performance bonds of $1,000,000 and less through a simple credit check. However, the surety bond company will still want to make sure the contractor has the experience to build the project.
Larger Solar Performance Bonds require the Solar Contractor to go through an underwriting process known as the 3Cs. This refers to Credit, Capacity and Character. The Solar Contractor will need to send in both company and personal financial statements, banking information, projects information and experience information such as an application.
Not all surety bond companies are comfortable writing Performance Bonds for Solar Contractors. Some of the smaller and regional surety bond companies tend to underwrite solar contractors more strictly as they do not have as much experience with them.
Similarly, many bond brokers are not experienced with solar contracts and do not know the right questions to ask or how to present them to the bond company.
Solar Contractors will find it easier to obtain Solar Performance Bonds if they work with both a surety bond company and bond broker who are experienced in the solar field.
Obtaining Solar Performance Bonds should not be difficult. With more solar projects on the way, solar contractors should get prequalified and be ready to provide bonds if asked for them. Axcess Surety has experience working with solar contractors and can help with all your surety bond needs including bonding power purchase agreements. Contact us anytime. Additionally, solar contractors may need other contract surety bonds and license and permit bonds. You can also visit our Surety Bond Guide and Energy Page to learn more about surety bonds and other solar solutions.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
