A performance bond is a surety bond issued by an insurance company or a bank to guarantee
satisfactory completion of a project by a contractor.
A job requiring a payment and performance bond will usually require a bid bond, to bid
the job.
When the job is awarded to the winning bid, a payment and performance bond will then be
required as a security to the job completion.
For example, a contractor may cause a performance bond to be issued in favor of a client for
whom the contractor is constructing a building.
If the contractor fails to construct the building according to the specifications laid out by
the contract, the client is guaranteed compensation for any monetary loss up to the amount of
the performance bond.
Performance bonds are commonly used in the construction and development of real property,
where an owner or investor may require the developer to assure that contractors or project
managers procure such bonds in order to guarantee that the value of the work will not be lost
in the case of an unfortunate event.
In other cases, a performance bond may be requested to be issued in other large contracts
besides civil construction projects.
The term is also used to denote a collateral deposit of "good faith money", intended to
secure a futures contract, commonly known as margin.
Performance bonds are generally issued as part of a 'Performance and Payment Bond',
where a Payment Bond guarantees that the contractor will pay the labour and material costs they
are obliged to.
In the United States, under the Miller Act of 1932, all Construction Contracts issued
by the Federal Government must be backed by Performance and Payment Bonds.
States have enacted what is referred to as “Little Miller Act” statutes requiring
Performance and Payment bonds on State Funded projects as well.
Performance Bond Cost.
Surety Bond Companies calculate the premium they charge for surety bonds based on three
primary criterion: 1) Bond Type 2) Bond Amount 3) the Applicants Risk
Bond Type.
Surety Bond Companies have actuarial information on the lifetime claims history for each bond
types.
Overtime, surety bond underwriters are able to determine that some surety bonds are more
risky than others.
For example, California Motor vehicle dealer bond has significantly more claims than the
straightforward notary bond.
If a given surety bond type has paid out a high percentage of claims then the premium
amount paid by applicants will be higher.
Bond Amount.
There are over 25,000 types of Surety Bonds in the United States and each bond has a designated
bond amount.
Surety Bond companies will determine your bond rate based on your risk and then charge
you a surety bond premium in the range 1-15% of the bond amount.
Applicants History/Risk.
Surety Bond companies attempt to predict the risk that an applicant represents.
Those who are perceived to be a higher risk will pay a higher surety bond premium.
Since Surety bond companies are providing a financial guarantee on the future work performance
of those who are bonded, they must have a clear picture of the individuals history.
Surety Bond Underwriters will consider the following when determining the premium to
be paid by an applicant: Once the surety bond type, surety bond amount,
and applicant risk are adequately assessed, a surety bond underwriter is then able to
assign the appropriate surety bond price.
Performance bonds have been around since 2,750 BC and the Romans developed laws of surety
around 150 AD, the principles of which still exist.
See also Completion guarantee
General contractor Independent contractor
Shop drawing Subcontractor
Submittals Surety bond
References
External links Surety Information Office – An association
dedicated to suretyship in the United States National Association of Surety Bond Producers
– NASBP is the association of and resource for surety bond producers.
[1] - How much does a Surety Bond Cost?