Decoding How Performance Bonds Work and Why You Need Them

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Everyone expects that the person they hire should complete the assigned job. But there can be instances when that job is not completed as intended, or not completed at all. A surety bond binds the contractor taking up the project to deliver what he committed to do. In case he doesn’t, the surety bond compensates the loss incurred by the project owner, charging the contractor for the same later.

Understanding Performance Bonds
Performance Bonds ensure optimum performance by the contractors throughout the project duration. These bonds are the most commonly used surety bonds for public work contracts that have an estimated value of $100,000 or more. However, that is only one of the conditions for issuing them. These bonds can also be used for managing company operations that may not be bound by this cap. Bidding could be done initially, post which the winning contractor has to furnish a performance bond as a guarantee for successfully completing the project.

These bonds create a win-win situation for all, bringing lucrative contracts for contractors and ensuring highly satisfying results for the project owners.

How Performance Bonds Work
Performance bonds safeguard the interests of the project owner if a work is not done satisfactorily or if the contractor has defaulted deliberately or even unwillingly. Since this risk of default is always there, surety bond institutions (banks/insurance companies/private lenders) run an extensive check on the contractor’s history before issuing the bond. They take into account his past experience, risk capital, financial statements, and more. Under the circumstance where the contractor’s history doesn’t seem credible enough, he is not issued the bond, thereby denying him the chance to win a contract too.

This way, there is a very little scope for a miss to ever happen. And if it happens, the surety bonds take care of the losses. There are rarely any government or private projects involving large investments that happen now without performance bonds.

Why You Need Payment Bonds

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If you are a contractor bidding for a construction project in Florida, chances are that you have heard of payment bonds. Most government projects will ask for a Florida payment bond as part of the bid condition.

What is a payment bond?
A payment bond is a type of surety bond and like any other surety bond, it has three parties:
– The Principal: The contractor who is required to buy the bond.
– The Surety: The surety company that sells the bond.
– The Obligee: The project owner who is asking for the bond.

The payment bond guarantees that the contractor will pay subcontractors, material suppliers and workers on time. It is usually required along with a performance bond and is submitted when the contractor wins the bid to the project.

Why do we need payment bonds?

To make sure everyone is paid on time: The payment bond makes sure that there are no delays or fraudulent behavior by a contractor when making payments. Without the bond, the project owner could become responsible for those payments.

To reduce disruptions: The completion of any construction project depends on timely payment of workers and material suppliers. Delays can cause unrest or stall a project for a prolonged period, resulting in huge losses for the project owner. The framework to ensure timely payment reduces the chances of such disruptions.

To protect against loss of reputation: While it is the responsibility of the contractor to make these payments, it is usually the project owner that is ultimately responsible. When the project owner is a government body, this is highly undesirable.

Fixing liability: The Florida payment bonds fix the liability on the contractor.

How Payment Bonds Work

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If you are in construction business, you must have heard of payment bonds. Most public construction projects in the state of Florida typically will require contractors, sub-contractors, or builders to have a Florida payment bond.

What is a payment bond?

A payment bond is required in construction projects along with a performance bond. The bond ensures that the principal will pay the suppliers, vendors, sub-contractors and laborers working on the project on time. It is a type of surety bond and like all such bonds, it’s a three-way contract between the obligee, the principal and the surety.

The principal is the party buying the bond, usually a contractor or builder. The obligee is the project owner and the surety is the bonding agency that is licensed to offer Florida payment bonds.

How does it work?

The payment bond is usually demanded at the beginning of the project along with the performance bond. When a contractor wins the bid for a project, he/she must submit these bonds. If the contractor subsequently fails to make the required payments, a complaint can be raised against the bond. If the claim is valid, the surety will pay the amount.

Why do we need the payment bond?

The payment bond is very common in public construction projects and there are good reasons for it:

– It makes sure that all parties in the project are paid on time. This also ensures that there are minimal disruptions, so that the project can be completed smoothly.

– Payment bonds enforce ethical practices, a vital requirement in a public-funded project.
– Without the Florida payment bonds in place, the obligee could be held responsible as the project owner. With the bond in place, the liability of payments is clear, and the funds are in place.

Surety Bonds and How They Work

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Surety Bonds perform an essential role in the construction industry. A Surety Bond is a three-way contract between the surety (the company providing the bond), the principal (the contractor) and the obligee (the project owner). The principal usually applies for the Surety Bond with the surety and it is to protect the obligee’s interest.

A Surety Bond is simply a three-party agreement or contract where the first party, the surety, guarantees the performance of the second party, the principal (contractor), if they default on their obligation to the third party, the obligee (project owner).

The reason Surety Bonds work so well is simple. They help to take the risk out of a risky business. Surety Bonds are designed to protect your interest from the actions of a third party.

There are Four Major Categories of Surety Bonds:

There are variety of Surety Bond types designed to meet your needs. In fact, almost any contract or obligation can be bonded. But, the four most common types of Surety Bonds include Contract Surety Bonds, Commercial Surety Bonds, Court Surety Bonds, and Fidelity Surety Bonds.

1. Contract Surety Bonds:

In the construction industry, one of the most common bond types are Contractor Surety Bonds. They include Bid Bonds, Performance Bonds, and Payment Bonds. All are needed for different purposes to ensure that the interests of the obligee are protected, especially if the principal fails to meet the terms of their contract.

Bid Bonds financially protect an obligee if the bidder awarded the contract fails to sign the contract and fails to provide the essential Performance and Payment Bonds.

Performance Bonds, on the other hand, are put in place to protect the obligee from monetary loss if the contractor fails to deliver the job according to their agreement.

Payment Bonds are there to guarantee that the contractor is going to pay the workers, subcontractors, and material suppliers involved in the project.

A Contract Surety Bond protects the project owner by guaranteeing that the contractor will follow the specifications and perform the work laid out in the construction contract. It also ensures that certain labor, materials suppliers, and subcontractors will be paid.

2. Commercial Surety Bonds:

Commercial Surety Bonds are Performance Bonds in which the surety (the company providing the bond), guarantees to the obligee (usually the public). The principal usually applies for the Surety Bond and are usually mandated by federal, state or local government agencies or private owners. The most common commercial contractors are manufacturers, wholesalers or retailers – as well as all businesses with a license get a Commercial Surety Bond. These bond types provide a guarantee by the principal of financial performance.

3. Fidelity Surety Bonds:

Fidelity Bond are a type of surety designed to protect a company or customers against specific types of loss that can include employee theft, malpractice due to forgery or false documentation and general theft or fraud. Fidelity Surety Bonds typically protect against the loss of money, equipment, or personal supplies.

4. Court Surety Bonds:

Court Bonds are a general term used for all Surety Bonds that are needed by individuals when they are involved in pursuing an action through a court of law. A Court Surety Bond can also be required by an attorney or similar entity before a court proceeding to ensure protection from a possible loss. These Court Surety Bonds typically guarantee the payment of costs associated with lawyer fees or appealing a previous court’s decision. Other Court Surety Bonds protect an estate against malpractice of the estate’s administrator.

Court bonds can be divided into two main categories: Judicial Bonds and Fiduciary/Probate Bonds. The main difference is that a Judicial Bond promises payment of sum of money that would be required in a court case, while a Fiduciary Bond only promises faithful and honest performance of a duty.

What Do You Need for a Surety Bond?

Before you apply for a surety bond in Florida, make sure that all your documents are in order so that you can expedite the whole process. Essential documents include:

Financial Records: Surety companies will ask for both personal and business records. For businesses with less than $20 million in sales, you will need to provide financial statements for the last year and for the interim period in this year, most recent personal and corporate tax returns, financial records of majority shareholders, and a bank reference letter. Companies with more than $20 million in sales need to show their audited financial records.

Resumes: Some surety companies may ask for resumes of key personnel. Make sure to highlight any relevant experience.

WIP Form: WIP stands for “Work in Progress” form. Ask your surety company for the relevant form. This details all the projects you have completed recently, ongoing work, and any outstanding surety.

Insurance: Some surety companies may insist on work insurance to see that there are no uninsured liabilities.

References: Companies issuing Surety Bonds in Florida will ask for references from associated parties, such as past clients, suppliers and so on. The references are an indication of other’s trust in your ability.

Apply for a Surety Bond Online:

Surety Bonds are usually required for contractors to work on projects. Without it, a contractor might not be able to work with project owners, workers, and material suppliers. These are the people who play a significant role in the successful completion of contracted jobs. Surety Bonds protect project owners if the principal does not fulfill their obligations per the terms of their agreement.

Given the number of construction projects around the country, there are many contractors bidding to be chosen for these projects. Surety Bonds are usually required to even bid on projects. To apply for a bond, you must find a reputable Surety Bond insurance company to apply with. You want to find a surety company with a good reputation and positive reviews.

Before choosing a surety company, make sure they have the available resources to support the project you are bidding on.

A Brief History of the Surety Bond: 

2,750 BC:

The earliest known surety contract was written on a Mesopotamian tablet. The contract was between a farmer who could not take care of his fields because he was drafted into the king’s army, and a neighboring farmer who offered to work his fields. They agreed to split the profit from the harvest evenly. The world’s first known surety broker was a local merchant who guaranteed that the second farmer would keep his word.

1894 AD:

While sureties have a long history, it wasn’t until the late 19th century that surety bonds became commonplace. The year was 1894 and Congress recognized the need to protect taxpayers and passed the Heard Act in 1894, which required surety bonds on all federally funded projects.

2017 AD:

Fast-forward more than a century to the year 2017.

Today, federal law requires performance and payment bonds for all public work contracts in excess of $100,000 and payment protection for all contracts above $25,000.

But obtaining a Surety Bond can be a grueling, time intensive process. That’s why more companies turn to America’s number one provider of Surety Bonds, Nielson, Hoover & Company.

No one knows Surety Bonds like NHC:

At Nielson, Hoover & Company, the only thing we do is Surety Bonds and we do it better than any other company out there. We specialize in all types of Surety Bonds – from Bid Bonds, Performance Bonds, Payment Bonds, and Maintenance Bonds to Commercial Bonds, Judicial Bonds, License & Permit Bonds, Fidelity Bonds, Payment & Performance Bonds, Public Official Bonds, and Subdivision Bonds.

At NHC, our people make our company. In fact, we have the largest staff of experienced professionals – larger than any other agency, larger than any surety company in the market.

We do business on your terms. That’s why we offer you multiple ways to request your bonds. Whether it’s online, an email, a fax, in-person or through our #1 Bond Request app or the industry’s first and only web-based portal, “Suretegrity”, where you can apply online and securely print a certified surety bond with just the click of a mouse. No matter how you apply, our simple application process is designed to make the job fast, efficient and accurate.

We are experts in all aspects of the construction industry, from understanding contracts and subcontracts to the details of how the industry’s accounting procedures and sureties function. This comprehensive knowledge, combined with a keen sense of the markets, allows us to tailor the perfect surety solution for our clients.

Over time, we’ve become trusted advisers to both the agents and the surety companies we represent.

Because of our knowledge, experience and the relationships we’ve built, only Nielson, Hoover & Company can guarantee you better service, more negotiating power and better terms than anyone else in the industry.

Nielson, Hoover & Company. You don’t become number #1 overall, unless you’re #1 through and through. To start working with the nation’s number one provider of Surety Bonds, visit nielsonbonds.com or call 305.722.2663.

Paving the way… it’s how Nielson, Hoover & Company became America’s #1 provider of Surety Bonds.

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Nielson, Hoover & Company’s (NHC) roots go back to the mid-60s when NHC’s Chairman and CEO, Chuck Nielson, began providing surety bonds for the construction industry. His knowledge and experience as well as his commitment to servicing his clients have helped build strong relationships with key engineering contractors/road construction companies throughout the Southeast. Working together, Chuck and the relationships he cultivated, became an integral part in the expansion of highway infrastructure throughout the region. Nearly 60 years later, the engineering/road construction industry has evolved substantially, and so has NHC. With significant technological advances, construction methods have changed considerably from those that were used more than half a century ago. Today, engineers and contractors working on our ever-expanding infrastructure are involved in areas of specialized construction that had not been conceived back when the era’s biggest innovation was four lads from Liverpool.

With today’s complicated highway systems including HOV toll lanes and complex ramp systems, it became evident that the need for a way to keep it all running smoothly was mandatory. As a result, Intelligent Transportation Systems (ITS) was conceived. ITS combines leading-edge information and communication technologies that are used in transportation and traffic management systems to improve the safety, efficiency, and sustainability of transportation networks in order to reduce traffic congestion and to improve drivers’ experiences. “Engineering contractors have had to adapt to meet the technical demands of their growing industry and as the leading surety broker in the Southeast, so has NHC,” said Chuck Nielson.

Throughout the years, NHC has developed a deep understanding of the construction industry – not only throughout the Southeast but across the nation. So, whether you need your first bond or as an established company you’re looking to obtain greater capacity and better terms, NHC’s knowledge and customized surety solutions will deliver better results than anyone else in the industry.

NHC’s strength comes from the uncanny ability to solve bonding problems that other agencies cannot. They pride themselves on the solid relationships they’ve helped build between the client and the surety companies they work with. Their surety specialists have extensive experience and the expertise to help you overcome the most challenging surety problems. Over the years, NHC has built trusted relationships with the nation’s leading surety providers as well as the movers and shakers in the construction industry. Whether you’re looking for more capacity, a way to improve your financial profile or even ideas on how to build your business, NHC can help.

NHC specializes in the following:

Contract Surety Bonds

Including: Bid Bonds, Performance Bonds and Payment Bonds

Commercial Surety Bonds

Including: Judicial Bonds, License and Permit Bonds, Public Official Bonds, and Miscellaneous Bonds

The reason more and more companies look up to Nielson, Hoover & Company is because they continually look after them. Experience, knowledge, personal service, and the best term and conditions – the road to success starts at NHC.

To learn more about Nielson, Hoover & Company’s diverse products and services, visit nielsonbonds.com or call 305.722.2673.