What are Performance Bonds?
Bonds differ in terms of the type of options available to the surety, and to the obligee, in case of default. Therefore, Performance Bonds (also known as Contract Bonds) provide obligees with a guarantee that, in the case of contractor’s default, the surety shall be requested to complete the contract per the plans and specifications.
How do Performance Bonds work?
In the event the bonded contractor fails to perform per the plans and specifications, then the owner, which has performed its contractual obligations, has the right of action against the surety in order to obtain completion of the contract and carry out the owner’s rights under the contract.
Types of Performance Bonds
Performance Bonds are part of Contract Bonds, which are divided into: Bid Bonds, Performance Bonds, Payment Bonds, and Maintenance Bonds.
How much do Performance Bonds cost?
Contractors can expect the rate to range between 2% and 3% of the value of the contract. Adjustments to the bond premiums are typically present, based on the final contract price. If price increases, the premium does to; and if it decreases, so does the premium. Contractors must include the cost of the bond in every proposal and change order, regardless of the total amount because bond premiums are usually reimbursed. Several small change orders may eventually turn into a large increase in the contract amount, thus resulting in an increase of the premium. Contractors want to avoid the premium to come from the profit.
Performance Bonds in Construction
Performance Bonds are required to guarantee that, in the event of contractor’s default, the surety will be demanded to complete the contract per the plans and specifications
How can I get a Surety Bond?
First, contact a professional surety bond producer and start building that relationship. Bond producers are business professionals with expertise in providing surety bonds for contractors, subcontractors, and other construction project participants. They are highly knowledgeable about the surety and construction markets and focus their main activities on surety markets and position construction firms for them to qualify for surety credit.
Bond producers offer invaluable business advice to assist contractors in securing its surety credit relationship, and improving surety credit, when needed. They gather information and documentation from contractors as required by the surety in order to evaluate a request for bonding. Having a successful relationship between contractor and the surety company is key. Developing and maintaining this relationship of trust, commitment, respect, and teamwork is a must when aiming to make full use of surety bonds.
If I am not approved to get a Bond, what options do I have?
In the case that your company does not fill the requirements to get a Bond or you need to increase your bond capacity, you can look for the following options:
- SBA Surety Guarantee Program
- Funds Disbursement Programs
- Collateral
- Joint Venture/Mentor Protégé
- Small Contractor Development Programs
What is a Collateral Bond?
A Collateral Bond is when you borrow money with the borrower offering an asset or a property as a security measure for the lender.
If the borrower fails to pay the debt on time, the lender acquires the asset or property that the borrower set as collateral.
What are the factors the underwriter will consider for your bond?
The underwriter will verify your 3 C’s
Character
o Integrity
o Reputation
o Relationships
o References
o Indemnity
Capacity
o Financial Statements
o Working Capital
o Work-in-Progress
Capital
o People
o Experience
o Equipment
o Business Plan
o Continuity
Performance Bonds Requirements
• Contract of the project that requires a bond
• Last Fiscal Year – End Financial Statement of the company, and the most current interim statement available (if Fiscal Statement is 6 months old, or more). For Bonds exceeding 250K, please provide Financial Statements of the past 3 years.
• Copy of the latest company Tax Return in full
(Individual return if sole proprietorship or Sub Chapter S)
• Financial Statements on owners (Stockholders). If possible, these should be concurrent with the company fiscal statement.
• Certificate of Insurance (COI)
• Resumes of key personnel
• Letter from Contractor’s bank including line of credit, security on line, current outstanding balance, past payment records and average balance information.
• Status of Contracts.
• Forms for specific bonds requests, either bid or final, and bonds provided. They should be completed to accompany the submittal of the documents, or completed when a subsequent bond is requested for an existing account.
How are Performance Bonds calculated?
Performance bonds are calculated as a percentage of the Contract Value and it is defined by the owner of such contract. They typically range between 100% and 50% of the of the Contract Value.
Performance Bonds with Bad Credit
Your credit score is taken into consideration in your bond analysis. In addition, even if your credit score is not good enough, there are some Surety Companies that can issue the bond. However, they will charge a significantly higher fee that could amount anywhere from 5% to 20% of the total bond amount.
Do Performance Bonds expire?
There is no need to get the performance bond back from the Obligee or close it out.
