Contract Performance & Payment Bonds

What is a Performance & Payment Bond?

Why Are Construction Performance Bonds Required?

Medium to large construction projects carry a lot of risk for the project owner. Typically they are beholden to:

• Financing companies
• Investors
• Business timelines and goals

It's imperative for the project owner to hit their timelines, budgets, and design goals.

The surety bonds involved in a construction project, including the performance bond, are the primary way project owners hold contractors accountable.

The performance bond is for the protection of the project owner and/or owners.

What Does a Performance Bond Protect Against?

As we've mentioned, the performance bond holds the general contractor accountable to goals of the construction project, protecting the project owners from:

• Negligently not finishing work on schedule
• Failing to follow building codes and performing inferior work
• Stealing from down payment or milestone payments
• Leaving a project after realizing they can't deliver on the contract
• Replacing contracted materials with cheaper alternatives without telling the project owner

When it comes down to it, any possible way a general contractor can break or fail to deliver on a project's contract allows the project owner to make a claim against the performance bond for financial compensation.

What Is The Performance Bond Amount?

The amount of a performance bond is typically equal to the size or the budget of the project.

This extends full protection to the project owner for any negligent or purposeful breach of contract.

Below we'll look more into how to qualify and obtain the lowest possible price for a performance bond.

What Are Other Types Of Construction Bonds?

Like we mentioned above, the performance bond is one of many construction bonds contractors are responsible for obtaining.

Here are some more of the more common construction bonds:

Bid Bonds

Before you can "win" a project, you must go through the bid process. A bid bond is usually required to project the project owner from unqualified or false bids just for the sake of winning a contract.

Payment Bonds

As the general contractor, you're not only beholden to the project owner, but to all of the subcontractors you'll hire to help complete the project.

A payment surety bond helps protect the subcontractors from a general contractor who fails to pay or does not completely pay the subcontractors they've gone into an agreement with.

Supply Bonds

Supply surety bonds are required to hold material and equipment suppliers accountable to the supplies required by the project as well as deliver timetables. This bond is purchased by the suppliers, not the general contractor.

Plus many other specific construction bonds that are specific to the particular project you may be working on.

How Much Does a Construction Performance Bond Cost?

The price of construction performance bond is going to be based on a rate quoted from a surety.

A surety is the insurance company that underwrites the bond.

The rate they'll quote is going to be based on a number of different criteria. Let's take a look at the high level process to get approved.

Step 1 - Credit Check And Contractor Application

The first step is always a credit check of the owner and owners of the general contractor.

Along with the credit check, you must complete an application. This application covers the following information:

• Business license number and address
• The type of construction work commonly performed
• The largest contracts completed and currently being worked on
• Any outstanding construction obligations
• Contact information of all owners
• The information for the performance bond being obtained
• High level questions about past liens and litigations
• Details about the scope of the current project

Step 2 - Personal And Business Financials (Conditional)

Personal and business financials are not always required to obtain a performance bond.

Here are the primary reasons why a surety will want to see personal and business financials:

• Limited or poor credit history of an owner
• A project value exceeding $500,000
• A project value that exceeds your historical average by a large amount (typically around $100,000)
• Have a limited construction bond history

It's very common that these financial statements do not need to be CPA prepared or reviewed. However, if your project value goes into the multiple millions of dollars in value, the surety will require a CPA prepared financial statement.

Whether the financials are prepared in-house or by a CPA, the required statements include:

• A profit and loss statement for the business
• A balance sheet for the business

Step 3 - Construction Bond History

The more information you can provide about your construction bond history the better.

The surety wants to know you've successfully completed a number of projects with no previous claims on past bonds.

This is not only an assessment on your claim history, but it's an assessment on your project size history.

If you're pushing into new levels of project size, the surety will see this as an added risk.

Step 4 - Conditional Required Collateral

Based on the personal credit and the size of your project compared to your construction history, the surety may require collateral to secure the bond.

In most cases, if collateral is required, it will be about 10% of the project size.

If you have poor or limited credit, the collateral can reach 30%, but it's rare that these levels are reached.

Construction Performance Bond Example Pricing

Based on all of these criteria, the surety will quote a rate.

This rate multiplied by the bond amount (again typically the project size) will be the price to purchase the required bond.

This is where working with and having a relationship with a specialized surety agency can save you thousands of dollars getting bonded.

As a surety agency, Surety Bonds Direct works with multiple A rated sureties who provide construction bonds.

This allows us to rate shop for you and locate the lowest possible price for your bond.

Plus with a good history, it becomes increasingly easier to get you bonded for future projects.

Let's use a bond amount of $300,000 for this example. The rates in the table range from really good to about average.

You can see the rate is going to have a significant impact on the price. And this is why finding the lowest rate from an A rated surety is ideal.

This is what we can help you do. Start the process today by filling out our online quote form or calling a bond specialist at 1-800-608-9950.

How Long Does It Take To Get a Construction Performance Bond?

As long as you have your project and business information ready to go when you contact us, the process to get pricing only takes 1 to 2 business days.

Based on the project amount and your bonding history there my be additional requirements as we've mentioned. Your bond specialist will help you navigate these requirements quickly.

Once you receive your rate and you agree to the price, purchasing your bond simply requires completing an online order form.

Construction Performance Bond Checklist

As the general contractor, you have a lot on your plate. There's no reason the bonding process needs to take a significant amount of time.

Here's the checklist to follow to ensure this process goes quickly:

• Have access to business owner information ready
• Make sure you have the full scope of the currently project available
• Even though you may not need them, have in-house profit and loss and balance sheet prepared
• Have your bond history ready because this can help you achieve a lower rate
• If you know you have poor credit or the project is your first of a substantial nature, be prepared to offer collateral

We have helped many contractors complete the bonding process in a matter of days when all of this information is ready to go.

What Happens After You Purchase Your Contractor Bond?

Once you purchase your bond, our issuance team will work with the surety and prepare your bond with the:

• The correct bond forms
• Required signatures and seals
• The required power of attorney

Every project is unique in how they require proof of being bonded.

Some projects will accept a copy of the bond. This means we can email it to you, speeding the process up.

Other projects required the original bond. This means we'll need to mail you a copy of the bond.

Once you receive your bond, you can provide it in your contractor package. If you need anything else from us, just let us know.

How Long Do Construction Performance Bonds Last?

Construction bonds must remain active for the life of the project. This includes the performance bond.

If the project is completed in under 12 months from your performance bond's effective date, you will not have to renew the bond.

However, if your project extends beyond 12 months, you will have to renew your bond.

This is another great reason to work with Surety Bonds Direct. You get assigned a bond specialist.

As your bond renewal date approaches, your specialist will contact you to see if you need to renew your bond for another year. Plus they'll have renewal pricing ready to go, making the process seamless.

What If You Required Additional Construction Bonds?

It's likely you'll require additional bonds for your project like a payment bond for your subcontractors.

In many cases a payment bond is purchased alongside the performance bond for the project.

We make this process easier for you by bundling the payment bond in with the performance bond at no additional cost.

Why Are Construction Payment Bonds Required?

Medium to large construction projects require a lot of coordination and teamwork to complete.

According to Nationwide Insurance it takes an average of 22 subcontractors to build a personal residence from scratch.

For medium to large commercial projects this number can be the same but the scope of the work will be much larger.

It's imperative for the general contractors to hit their timelines, budgets, and design goals.

And the subcontractors and suppliers want to know they will be paid from the project financing.

It's entirely possible that a project gets scrapped or delayed causing a subcontractor to not get paid for their work.

Public Works Projects

Cities that commission contractors for public works projects legally require a payment bond for any project valued over $100,000 according to the Miller Act and Tiny Miller Act.

The Tiny Miller Act is a name given to the local requirements for this payment bond requirement. Each state will have additional bonding requirements and amounts unique to them.

The reason payment bonds are legally required for public works projects is because a subcontractor cannot put a lien on public or city property if they are not paid.

This would leave them without any protection and it's why state, county, and municipal governments legally require payment bonds over a specified project size.

Bottom line, the surety bonds involved in a construction project, including the payment bond, are the primary way project owners, subcontractors, and suppliers hold contractors accountable.

What Is The Payment Bond Amount?

Just like the performance bond, the payment bond amount is typically equal to the size or the budget of the project.

This extends full projection for the subcontractor's services in the event they are not paid or partially paid.

It's important to know the performance bond and the payment bond are two different bonds even though they have the same amount and they are typically purchased together.

How Much Does a Construction Payment Bond Cost?

When you're bidding on a project, you typically have to start with a bid bond.

And in most cases during the bid bond process, you'll get qualified for a performance and payment bond.

The good news is, when you work with a specialized surety agency like Surety Bonds Direct and purchase your performance bond, you also get the payment bond at no additional cost.

Here's how the price is determined.

The price of construction surety bond is going to be based on a rate quoted from a surety.

A surety is the insurance company that underwrites bonds in the construction space.

This rate is based on a number of different criteria. Let's take a look at the high level process to get approved.

Step 1 - Credit Check And Contractor Application

All owners of the business will need to have a credit check completed.

There is also an application where you'll have to detail the scope of the project and a brief history of your company's contractor history in terms of project size.

Step 2 - Personal And Business Financials (Conditional)

The surety may require person financial statements of the owner and the business depending on the:

• Credit history of the owners
• Scope of the project
• And your companies history with projects of the specified size you're currently bidding on

The good news is in most cases these financials can be prepared in-house in most cases.

Step 3 - Construction Bond History

The more information you can provide about your construction bond history the better.

This is mostly covered in the application but it's a major factor with how the surety will price the bond amount you require. Provide a full history focused on how you've successfully handled increases in project size.

Step 4 - Conditional Required Collateral

In rare cases based on all of the steps above, the surety may require collateral to issue the bond.

In most cases the collateral is going to be anywhere from 8% to 10% of the bond amount. But if credit and construction history are an issue, it can reach upwards of 30%.

Construction Performance Bond Example Pricing

Based on all of these criteria, the surety will quote a rate.

And remember this process will be mainly focused on the performance bond. We can roll the payment bond into the cost of the performance bond.

Read our performance bond page to see a full example or pricing.

How Long Does It Take To Get a Construction Performance And Payment Bond?

It only takes about 1 to 2 business days as long as you have the necessary owner and business information along with the project scope.

Based on the initial application the surety may come back with additional requests for information like a request for financials or collateral. So it's a good idea to be prepared for these requests, even if you don't have to fulfill them.

Once you receive your rate and you agree to the price, purchasing your construction bonds simply requires completing an online order form.

What Happens After You Purchase Your Contractor Bond?

Once you purchase your bonds, our issuance team will work with the surety and prepare your bond with the:

• The correct bond forms
• Required signatures and seals
• The required power of attorney

Every project is unique in how they require proof of being bonded.

Some projects will accept a copy of the bond. This means we can email it to you, speeding the process up.

Other projects required the original bond. This means we'll need to mail you a copy of the bond.

Once you receive your bond, you can provide it in your contractor package and bid package. If you need anything else from us, just let us know.

How Long Do Construction Performance Bonds Last?

Construction bonds must remain active for the life of the project. This includes the performance and payment bond.

If your project lasts over a 12 month period from when your payment bond becomes active, you will need to renew the bond for an additional 12 month term.

As your bond renewal date approaches, your specialist will contact you to see if you need to renew your bond for another year. Plus they'll have renewal pricing ready to go, making the process seamless.

What If You Required Additional Construction Bonds?

As you'll discover, there are many construction surety bond requirements depending on your project.

The core three are the:

• Bid bond to ensure your bid is serious and you're vetted to take on the project
• Performance bond to ensure you complete the project according to the contract
• Payment bond to ensure you pay your subcontractors and suppliers

Click above to learn the details about each.

And remember, the process to get qualified and purchase these bonds happens all at once.

So start by filling out our online quote form and tell us about your project including the bond amounts and project value.

You can always contact a bond specialist directly by calling 1-800-608-9950 and they will help you get through the process so you can get the information you need fast.