Winning a bid on a construction project is a big deal.
And getting started on time is vital to completing the project according to the contract you've signed.
This is why when you bid on a project and secure your bid bond, you also get qualified for a performance and payment bond.
In this short post, you'll learn:
- What a performance bond is
- Why a payment bond is
- Why these bonds typically go together
- What you'll need to pay as little as possible getting your bonds
What is a Performance And Payment Bond?
Think about any construction project from the project owners perspective.
At a high level, they want a project to be completed:
- On time including project milestones
- At or below budget
- Following building codes and contract specs
This is why they require a performance and payment bond before the project can begin.
If the is your first time getting for a job, learn more bout contractor bonding requirements.
It's almost he exact same process as getting your contractor license bond.
The Performance Bond
The performance bond holds you accountable to completing the project according to the contract.
If you fail to complete the project or don't meet the specific requirements of the contract, the project owner can make a claim against the bond for financial compensation.
They would use the bond compensation to find and hire another contractor to fix the issues.
Of course construction projects never go according to plan.
There will always be delays and challenges in any project. Most project issues that arise does not mean the project owner can or will make a claim against the bond.
Bond claims typically only happen when there is purposeful negligence by the contractor.
This is how all surety bonds work.
Payment Bond
According to Nationwide Insurance, the average residential project uses 22 subcontractors.
Commercial projects can easily use more.
A payment surety bond holds you accountable to paying all subcontractors for work completed on the project.
If a subcontractor completes work and you purposefully neglect to pay them according to the contract, they can make a claim against the payment bond for financial compensation.
Keep in mind, depending on the project, subcontractors may be required to purchase their own performance bond.
Just remember, these bonds are used to hold each party accountable to do what they said they would do to complete the project.
How Are Performance and Payment Bonds Priced?
The good news is you're pre-approved for the performance and payment bonds while when you get approved for your bid bond.
The performance and payment bond are typically bundled together (with the bid bond) because most projects require them.
You can almost think of purchasing each bond as a bundle deal.
Here the steps:
Step 1: Personal Credit Check and Construction History
A surety is a specialized insurance company that specializes in underwriting different types of construction bonds.
To evaluate any risk associated with bonding your construction company the surety assess these factors:
- The primary credit of the owner and/or owners
- Your past construction experience including job sizes
- The bond history of the owners on previous jobs including license bonds
From these factors, the surety determines a rate.
This rate multiplied by the bond amount for your job is the price you'll pay for both the performance and payment bonds.
Typical Rates For Performance and Payment Bonds
Most rates come back within the 2.5% to 4% range. You would then multiple this rate by the job total to get the bond price.
The bond amount (being equal to the project projected total cost) is the maximum amount a claim can be if a valid claim is filed against you.
Step 2: Purchase The Bond
Once you're approved all you have to do is purchase your bond.
This is why we get you approved for your performance and payment bond during the bid bond process.
You'll know the pricing well in advance.
And if you win the bid for the job you can immediately purchase your performance and payment bonds to not miss a step getting started on your project.
Step 3: Have Your Bond Issued
Issuing your bond is a fast process.
Again, because we have you already approved, it only takes one day at most to have your bond issued.
Some construction jobs require a custom bond form. If this is the case, you'll be informed and we'll get that form during the bid bond process.
If there is no required form, we use an AIA (American Institute of Architects) performance bond form. This is a widely accepted form.
Once your bond is complete, we'll email you a copy and mail you a physical as well.
Learn more pricing details with examples and submit your performance bond quote request.
Get Your Bid, Performance, and Payment Bond Today
We love to build lasting relationships with our contractor customers to be your go-to source for your bonding needs.
Reach out today by starting a quote request. You'll immediately be assigned a bond specialist you can work with through multiple projects.
If you would prefer to call 1-800-608-9950 and ask for a bond specialist today.
