Performance Bonds ~ An Overview

Bond Penalty: Based on contract total

A surety bond is a third party guarantee that the principal (insured) will comply with specific provisions of the bond. A performance bond is a surety bond that guarantees that the principal will "perform" specific contract requirements. Also known as a contract bond, this obligation secures the completion of a construction project or in the case of a service or supply agreement, faithful performance of the terms of the that agreement. Often required on public projects (and obligatory under the Heard Act, the Miller Act as well as various state "little Miller" acts), the bond provides benefits to all of the parties with interest in the project.

The Project Owner

  • The project owner may reasonably assume that the contractor will complete the project on time, on budget and in compliance with the contract specifications.
  • The project owner can trust that a competent surety underwriter has investigated the character, capacity and operating capital position of the contractor to ensure that he or she is likely to successfully deliver a completed work.
  • The project owner may also receive the benefit of lowered cost 'pass throughs' based on suppliers offering preferred supply pricing to bonded contractors (these are covered under payment bond obligations, often paired with performance bonds).

The Contractor

  • The contractor benefits by achieving access to often lucrative public jobs. Performance bond capacity makes contractors more competitive!
  • Contractors are more likely to be offered better supply agreements.
  • Contractors may also enjoy broader access to sub-contractors that are more willing to perform work where a bond guarantees their payment.
  • Banks and finance institutions are much more likely to offer access to capital on projects that are covered by a performance bond.

The Public

  • In the case of public work, performance and payment bonds guarantee timely delivery without any concern that mechanic's liens may be filed against the project property.
  • The performance bond requirement creates a mechanism of open, competitive bidding through which the least expensive bidder is awarded the contract, ultimately saving the taxpayer money.

"Bottom line", all of the interested parties understand that when a competent surety bond underwriter approves a contractor, that the surety has carefully considered the qualifications of the bond applicant before committing itself to guaranteeing his or her work. Contract surety underwriting significantly mitigates the risk of a contractor failure in an inherently risky industry with high failure numbers.

A performance bond premium (cost) is based on the contract total. Usually the bond penalty (bond amount) is equal to the project total, but not always. The obligation guarantees all of the provisions of the contract and will pay the obligee (project owner) money up to the full penalty. Generally, a performance bond is an irrevocable, strict guarantee however that does not mean that the contractor and surety are necessarily at the mercy of the project owner. The obligee must also comply with its obligations to the contractor. An obligee default can result in a full release of the contractor and his surety from their joint obligation.

Interested in learning more about contract surety bonds? We recommend two excellent publications on the topic at PerformanceBond.com. Call us at (800) 373-2804, email Underwriting@SuretyOne.com or click here to chat with an underwriter real-time. Performance bond leader, Surety One, Inc. is an experienced underwriter of contract surety bonds. We provided unmatched support of your bid bond need, based on our knowledge about the industry and our focus on our personal relationship with contractors. We facilitate expeditious review and response to your bid bond request in a polite, clear way.

Surety bond application review and quoting are free of charge. There is no obligation to purchase.

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