Performance Bonds
Ensuring Project Success and Client Confidence
What is a Performance Bond?
A performance bond is a type of surety bond issued by a surety company on behalf of a contractor (principal) to a project owner (obligee). It guarantees that the contractor will complete the project
according to the contractual terms and conditions. If the contractor defaults, the surety steps in to compensate the obligee or arrange for project completion.
Benefits of Performance Bonds
Risk Mitigation
Protects project owners from financial loss due to contractor default.
Enhances Credibility
Demonstrates the contractor's commitment and financial stability.
Legal Compliance
Often required by law for public projects and many private contracts.
Competitive Advantage
Helps contractors qualify for more projects by meeting bonding requirements.
How Performance Bonds Work
Application
The contract needs the Facility in place to apply for the performance bond.
Underwriting
The surety evaluates the contractor's financial health, experience, and ability to complete the project.
Issuance
Performance bonds are usually 50-100% of the contract price. The bond covers the full performance of the contract with the maximum penal sum of the bond being the 50-100%.
Project Execution
The contractor proceeds with the project under the bond's guarantee.
In Case of Default
If the contractor fails to perform, the obligee can claim against the bond. The surety may pay damages up to the bond amount or arrange for project completion.
Role of Insurance Brokers
Advisory
Guide clients through the bonding requirements and application process.
Facilitation
Help clients gather necessary documentation for underwriting.
Access to Sureties
Connect clients with reputable surety companies offering competitive terms.
Risk Assessment
Assist in evaluating potential risks and ensuring clients are prepared for obligations under the bond.
Why Performance Bonds are Essential
Financial Security for Owners
Protects investment by ensuring project completion or compensation.
Builds Trust
Contractors with performance bonds are seen as reliable partners.
Market Requirement
Many projects mandate performance bonds as part of contractual agreements.
Dispute Resolution
Provides a mechanism for resolving issues without lengthy legal battles.
Enhance Your Clients' Opportunities
By offering performance bonds, you enable your clients to:
Qualify for More Projects
Meet mandatory requirements for government and private contracts.
Demonstrate Reliability
Show commitment to fulfilling obligations.
Secure Larger Contract
Bonding capacity can help clients bid on bigger projects.
Get Started with Performance Bonds
Ensure your clients have the protection and credibility they need. Contact our team of surety experts today to discuss performance bond solutions tailored to your clients' needs.
FAQs about Performance Bonds
What factors affect the cost of a performance bond?
The cost is influenced by the contract amount, the contractor’s financial stability, history of the corporate financial strength, and project complexity.
Is collateral required to obtain a performance bond?
Collateral is not always required but may be requested by the surety, especially if there are concerns about
the contractor’s financials.
Can a performance bond be cancelled?
Generally, performance bonds remain in effect until the project is completed. Cancellation is rare and
typically requires mutual agreement.
What is the difference between a performance bond and a payment bond?
A performance bond ensures project completion, while a payment bond guarantees that the contractor
will pay subcontractors and suppliers.
How does a claim on a performance bond affect the contractor?
A claim can damage the contractor’s reputation, creditworthiness, and ability to secure future bonds.
