Performance & Payment Bonds
WHAT IS A PERFORMANCE BOND?
A Performance bond is a type of surety bond used in contractual projects to make sure that the contractor adheres to all the terms and conditions of the contract and delivers the work on time. It also makes sure that the contractor meets the specified deadline and does not go beyond the budget.
Like other surety bonds, performance bonds are an agreement between three parties. An example would be a commercial business that needs some remodeling work done and hires a construction contractor.
In this case, the bond would be between the contractor (principal), the business owner (obligee), and the person who issues the bond (surety company) The business is protected by the bond and the contractor has to sign a performance bond before getting the approval to proceed with the project.
If the contractor does not meet the agreed upon deadline, requests additional money, or does not follow the contract language exactly, a claim can be put on the bond by the obligee, and the compensation to the obligee can be granted by the surety company. However, the principal would be required to reimburse the surety later.
Once the contractor satisfactorily completes the job and adheres to the rules of the bond, the bond then becomes null and void.
WHAT IS A PAYMENT BOND?
Payment bonds are a type of surety bond that is required by contractors to guarantee that all parties involved in the project including the subcontractors, material suppliers and workers will be paid, regardless of the project’s completion. The cost of these is based largely upon the contract value of the job, and they are normally presented along with performance bonds. Therefore, all contractors who want to find work in their state will need to be eligible for these bonds.
Since it is difficult to predict the outcome of a project and its completion, project owners usually require Payment Bonds. Generally, all the parties involved with a project are paid when the project is completed as per the given specifications of the contract.
Payment bonds are generally issued with a performance bond. Having a payment bond in place protects the obligee from being held responsible if the principal does not pay their subcontractors or material suppliers. If there is any default on a payment, the payment bond guarantees that all parties will be paid for their services regardless of if the project is completed or not, and provides a lien free project.
HOW MUCH IS A PERFORMANCE & PAYMENT BOND?
The cost of a performance and payment bond will vary from less than 1% to over 3% of the full contract amount. The cost is very much dependent on the level of assurance the principal can provide. Factors that are considered include the bond amount,contractor's credit, and quality of financial statements, as well as how often the contractor will need a bond. State requirements vary, while federal projects generally require a performance bond when the amount of the obligation(contract amount) is over $150,000.
As one of the largest bonds only agencies in the USA with more sureties than any other agency, we have developed great relationships with decision-makers and know how to properly present you to a surety to get the best terms and conditions the market can deliver.
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