What is a Performance Bond?
Requirements for certain state and federal construction projects include posting a surety bond. Performance Bonds are put in place to ensure the job is completed to the specifications outlined in the contract. This requirement was set for public work contracts of $100,000 and above by the Miller Act. If the contractor is unable to complete the project the bonding company will be brought in to make the obligee whole. The contractor will be responsible for reimbursing the surety company on any claim payout. Performance Bonds are job-specific and different from your state-required Contractor License Bond.
What is a Payment Bond?
A Payment Bond is a guarantee from a surety company that is generally issued along with a Performance Bond. Payment Bonds provide a guarantee to the owner of the project (obligee) that certain sub-contractors, suppliers and laborers will be paid if the contractor (principal) fails to do so. Most of the time, both Performance and Payment Bonds will be required and the surety will charge a single premium.
What is a Bid Bond?
When looking to secure a job or project, contractors are sometimes required to provide a bond when submitting their bid. The Bid Bond states that their (contractors) surety company will provide final bonding if the contractor is awarded the project. Bid Bonds are typically written for a percentage (5%/10%/20%) of the total contract price, but can also be for a specific dollar amount. Claims can be brought against the Bid Bond if the awarded contractor refuses to enter into the contract. The claim amount will be based on the cost difference between the contract price in question and the new contractor bid. Some Bid Bonds call for a full penal sum percentage claim/recovery (not just the difference between the lowest bid and 2nd bidder).
What is a Maintenance Bond?
Maintenance Bonds, also known as warranty bonds, are guarantees provided by a surety company that, for a certain period of time, any workmanship or material defect in the construction project will be addressed.
What type of work may have Performance and Payment Surety Bond requirements?
The following are a few types of construction work which may require bonding:
- General Contracts
- Low Voltage Cabling
- Service Contracts
- Steel Erection
- Street & Roads
- Supply Contracts
- Tree Trimming
- Water & Sewer
How much will my Performance and Payment Surety Bond cost?
Cost varies on a number of factors, including the credit and financial strength of the owners and their business itself. As with most surety bonds, stronger accounts warrant a lower premium. Typical contract rate filings are largely based on final contract price instead of the bond amount, as obligees sometimes require less than 100% Performance and Payment Surety Bonds. Rates on smaller Performance Bonds ($400k and below) are 3% annually and can go down to 1% annually on larger contracts.
What do surety companies look for in providing bonds to contractors?
Surety companies look at three characteristics when underwriting a contractor: Capacity, Capital and Character. Capacity is a review of the contractor’s skill and ability to perform the work that’s requiring the bond. Capital is a review of the financial position of the contractor in order to determine if they have the financial resources to undertake the projects they are interested in. Character is the determination of the contractor that they are of good sound character and will meet the obligations they agreed to.
How do I get a Performance and Payment Surety Bond?
Here at Pacific Surety, we strive to make the bonding process as easy as possible. As a broker, we represent a number of different markets and can get you the lowest price. A number of surety companies are now offering “quick” bond programs consisting of a simple application and “soft” credit check for approvals up to $400,000 on a single project. Additionally, on bonds $400,000 – $800,000, a single/aggregate can be approved with some additional information on the contractor. (financial statements, etc.)
Pacific Surety is also proud to support larger contract requirements. ($1 million and above) The information required may vary based on the size of the project, but the following items will likely be required:
- Contractors questionnaire
- Business financials (CPA prepared)
- Personal financials on all owners
- Resume showing prior experience on job size
- WIP (work in progress)
Can I get a Performance and Payment Surety Bond with bad credit?
While bonding for contractors with credit or financial issues isn’t always an option, Pacific Surety has access to Small Business Administration Programs that make it possible. There are many factors in obtaining SBA approval, but Pacific Surety is here to help! If you have any specific questions on the process, please contact our knowledgeable staff.