Everything that you should know about performance bonds
Project owners usually require contractors to have a document called a performance bond because it assures them of the timely completion of a project. For contractors performance bonds are helpful because it builds their credibility and helps them land more projects. If you are a contractor just starting, here is some information about these bonds that you will find helpful.
How does a performance bond work?
It is a surety bond that guarantees the contractor will fulfill their obligations to the project owners or investors, including completing work on time and meeting other obligations. If the contractor fails to meet certain aspects of the contract, such as not completing work on time or fulfilling other obligations, their surety company (which has issued the bond) compensates the owner financially.
What are some of their types?
A performance bond comes in different formats depending on the project type. There are three main types: CCDC Performance Bond, Form 32 Performance Bond, and SAC Head Start Subcontractor Performance Bond.
How do they differ from insurance?
In an insurance policy, the insured pays premiums, then receives benefits if they have an accident or injury. In contrast, a performance bond provides coverage to the owner of a project. If they make a claim against the bond, and the surety company must compensate them financially, they will recover the amount from you later.
Industries that commonly require them
The following industries usually require these bonds:
- Construction
- Real Estate
- Construction Management
- Engineering and construction
Services-based contractors like snow removal, tree cutting, landscape, and janitorial also require these bonds before taking up projects.
Cost of a performance bond
In general, the cost of a performance bond is higher for larger projects. Usually, they cost between 0.5% and 1.5% of the total contract price. The exact range depends on the amount of coverage required by the owner.
Documents required for getting these bonds
Some of the documents that you require to obtain these bonds are:
- Your company’s financial statements
- A questionnaire provided by a surety advisor
- Total net worth statement
- Professional resume
- A copy of your banking agreement
What is an indemnity agreement?
It is an agreement between the contractor and the bond company, which agrees to compensate the project owner financially if you, as the contractor, fail to meet the obligations mentioned in the contract. However, since it is not an insurance policy, the surety will demand a repayment, which you must pay. If you don’t, they might initiate legal action against you.
Why should you hire a surety broker?
A surety bond broker is a third party that acts as your legal representative when you apply for or for an extension of a surety bond. They can also help you with other aspects of the project, such as obtaining permits and inspections, arranging bonding agents, and reviewing financial documents.
A surety broker performs various services on your behalf. For example, they review your financial statements, help you gather the necessary information and documents, negotiate with the bond company, and work to increase your bond limits. Before hiring a brokerage company, ask them which surety companies they have working relationships with and how fast they can help you secure the required bond.
Moreover, if you are a new construction company or firm handling jobs under 1,00,000 CAD, a brokerage company can offer a program to help you build a relationship with a surety company and build your first facility.
You should consider contacting a surety brokerage company to obtain performance bonds as a contractor because they will require it before handing you a project. It will establish your credibility as a trusted contractor and help you land more projects in the future too.
