One of the riskiest industries to be involved in is the construction industry. It’s due to this risk that contractors are required to hold a range of bonds and each of these bonds are designed to reduce different types of risks. Two of the most common types of bonds are payments and license bonds, but there are others, too. These include contract bonds and bid bonds, labor and materials bonds and construction performance bond. It’s performance bonds that are the most popular around. These are still prevalent on public works projects, too!
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What is a performance bond?
The performance bond is a guarantee that the contractor doing the construction work will fulfill their obligations. This includes all of the obligations in the construction agreement that was agreed at the beginning of the job. Finding the right bond companies for contractors is important if you want to ensure that you are adequately covered, and that means getting a performance bond sorted as early as possible. Construction performance bonds also provide financial compensation to the property owner to the amount of the bond if the work isn’t completed by the contractor.
There are three things to consider when getting a performance bond: the principal (property owner), the obligee (the contractor) and the surety (the contractor’s bond company). Most of the time, a performance bond for construction is issued for the benefit of the company owner. However, it’s going to benefit everyone involved to have a construction performance bond. If the contractor defaults or delays during the project, the bond is there as a type of insurance to support the owner. A construction performance bond can be the best thing to use to maintain a steady cash flow. It’ll also help to avoid any work delays during construction.
For the contractor, a performance bond claim means that there has been a serious issue on the project and they cannot complete their duties. It can mean that the entire project is at risk of falling apart and payments would be at risk, too. For the surety, the bond claim means that they have to back the money to make sure that the project can be done and they may have to get a subcontractor performance bond for another contractor to complete.
How performance bonds work
When it comes to public works, performance bonds are the most common. They might be required on other types of construction projects, too. Bid bonds and payment bonds are also required when a contractor asks for a performance bond. A bid bond is commonly used for bidding on new jobs and it ensures that the contractor will follow up on that bid. The property needs to be protected from title claims, and that’s where the payment bond comes in. If a performance bond is required, it’s up to the contractor to get it! There are subcontractor performance bonds available, too, if they are required by additional contractors on the job.
How to get a performance bond
If you are taking on a job as a contractor, the first thing that you need to do is determine whether you need a construction surety bond or not. The next step is to start looking into bond companies for contractors and secure them. For performance bonds, you need to choose from bond companies for contractors that are experienced in the right type of construction. There’s no use in getting a construction surety bond for a company that does not know about the construction that you do.
What does it cost?
The cost of the performance bonds really does depend on the company you choose and the job you’re about to do. However, it’s important to note that every single bond has a specific amount that it can guarantee. Performance bonds are usually issued for the full contract amount, and it costs around 1% of the total amount of the project. There are a variety of factors that could affect the price, though, and even something in the credit history of your company can affect the cost of the bond.
You can take a range of precautions to ensure that you reduce the cost of your construction performance bond.
Performance bonds: avoiding claims
The easiest way for a contractor to avoid a claim on their performance bond is to ensure that they don’t default on the contract set out from the beginning. The thing is, life happens and every contractor no matter how experienced they are can run into problems that they didn’t anticipate. If you want to avoid a claim as a contractor and you can see problems on the horizon, call and reach out to the bond company and talk about what’s going on. You might be able to resolve any issues before a claim is filed.
If you do end up defaulting on the contract, the surety company will take action. This can be in any way from a payout of the bond, they may finance the rest of the work that is yet to be completed, and they may even work together with the client to finish the contract with a replacement contractor. They can also take over the entire finding and funding of a new contractor. When it comes down to it, though, as the contractor you still have to compensate the surety for money to be paid out. This is why communication is the best possible tool for a contractor. You should always look for alternative solutions where you can before an issue becomes so big it cannot be overcome.
Choose the right bond companies for contractors
A performance bond isn’t just for clients – it’s for contractors to protect themselves from any issues that could occur. It’s a way to build financial security for everyone involved in the purchase of a construction bond. Things can get out of hand quickly if a performance bond isn’t included in the consideration of funding for a project. So, the best thing that you can do today is to call a great contractors bond company and get your bond sorted.