Almost any contract can require a performance bond. A performance bond guarantees that the contract will be completed according to its terms. It is a powerful tool to protect the contract owner against default. If the principal on the performance bond fails to complete the contract, a claim can be made against the performance bond and the surety bond company writing the bond will have to provide financial resources to make sure the contract gets completed. Below are the most common contracts requiring performance bonds and how they may be used. Performance Bonds are generally divided into two categories which include Construction and Non-Construction Performance Bonds.
The most common use of performance bonds is for construction contracts. In fact, Federal contracts valued at $150,000 or more require performance bonds under The Miller Act. Most other public projects require them as well to protect taxpayer dollars. Performance bonds do this by helping to guarantee that a contractor will complete the contract at the agreed upon price and terms.
Construction contracts are risky endeavors that often end up with disputes. If the parties are forced to resolve the disputes through litigation, the process can be very expensive. Performance Bonds protect project owners (called the obligee) by giving contractors strong financial incentive to complete projects according to the contract terms and at the contract price.
As part of the process of obtaining a performance bond, the contractor must provide the surety bond company with indemnity. Indemnity means that the contractor must reimburse the bond company for any claims they pay, including costs. Therefore, if a contractor does not complete the construction contract, or tries to increase the cost, the project owner can file a claim against the performance bond. If the bond company pays out, they will seek reimbursement from the contractor, which could put the contractor out of business. This gives the contractor a very strong financial incentive to live up to the terms of the contract and avoid a bond claim.
Some international construction projects may need performance bonds. Contracts from both the U.S. operations performing work overseas, and Overseas companies performing work in the U.S. can be covered by performance bonds. Bonds are often required by the local government and/or lenders in these cases. You can read more about these bonds here.
Although construction contracts are the primary use of performance bonds, technology contracts are gaining ground. Whether providing IT support services, broadband, or just maintenance, companies are looking for ways to guarantee their costs and contracts are met. Performance Bonds are becoming an increasingly popular way to do this. This is especially true for technology contracts with public entities. You can read more about IT Performance Bonds here.
Cleaning or Janitorial Services have long used performance bonds to guarantee their contract obligations. These Janitorial Bonds are often used to guarantee prices of long term cleaning contracts up to five years or more. This type of contract is often referred to as a Service Contract. Again, these bonds are common for government and federal contracts, but are also becoming increasingly popular for private commercial cleaning contracts. You can read more about Janitorial Bonds here.
School Bus Contract with public schools often require performance bonds. These bonds generally guarantee the supply of buses and drivers for a specific period at a specified price. By providing a performance bond, the school or municipality is protected from price hikes by the bus company and will have financial protection if the company cannot fulfill their contract services. Going to another bus company would certainly cost more and the performance bond provides financial protection if they must do so.
Security services often require performance bonds as well. These can include guards services, security monitoring and others. The bonds guarantee that the security company will provide guards and/or security services at a set price for a certain duration. Again, performance bonds for security services are common when a contract for the government exists such as guarding government buildings or property. Read more about Security Performance Bonds here.
Printing Services also require performance bonds when public money is involved. For example, a contract to print bus passes for a municipality may need to be bonded. The bond guarantees that the printer will honor the terms of the contract for the contract period.
Another very common use for Performance Bonds is mowing contracts on public property. Consider the many roads, highways and government buildings that need to be mowed. Mowers bid on these properties for a year or more. Performance Bonds protect the public by making sure the mowers honor these contracts for the contract period. You can read more about Mowing Bonds here.
Many food service operations also require performance bonds. Consider a stadium that wants to provide food to its attendees. The contract for supplying food and staff for a year may be substantial and they will want to make sure the vendor can live up to the contract. A performance bond is one way to provide this guarantee. These performance bonds are also common in school districts.
Waste Haulers also commonly need performance bonds. Generally, their contracts to pickup and haul waste for a municipality are large and cover multiple years. Because public money is involved, these contracts almost alway require performance bonds.
There are also many types of obligations where a performance bond is not appropriate. It may be because a different type of surety bond is a better fit to guarantee some of these obligations.
Even though they both have “performance” in the name, projects with performance guarantees are not a fit for performance bonds. Performance guarantees require a specific level of output. This is common in the energy sectors. For example, a contract to build a power plant may require a performance guarantee of a certain amount of electricity. There are insurance products that can cover these guarantees but they are not typically covered by a performance bond.
Projects that are very long term in nature, or that have very long term warranties are often not a good fit for performance bonds. Guarantees that last longer than 5 years are typically frowned upon by performance bond companies. There are exceptions. Really strong companies can get performance bonds for long term projects, this is not the norm.
Although some international contracts call for a performance bond, they are often looking for a letter of credit from an international lender instead. It is important to find out what type of guarantee and forfeiture language the project owner is looking for in these circumstances.
Reclamation is often required by mining contracts after a company has harvested the resources from an area. These complicated and long term guarantees are covered by reclamation bonds and not performance bonds, however.
These are common types of contracts that need performance bonds but the possibilities are limitless. Almost any obligation with a contract could use a performance bond as a means to protect the project owner. Learn more about performance bonds and what it takes to get them here. You can also learn more about Performance Bond Costs and Claims by visiting using these resources.
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