How Do Performance Bonds Work?

Obtaining a performance bond is usually required for construction projects. Surety companies issue the bond to contractors (the principal) bidding ona project. Once they win the contract, the contractormustprovide the bond.

The amount of a performance bond is based on the contract between the project owner and contractor. The rates for performance bonds can vary, depending on the total cost of the project, contractor’s credit and financial history, and other factors.

The surety company will have to pay the owner (the obligee) if the contractor fails to complete the contract. The amount paid by the surety company is according to the bond value.

When is a Performance Bond Required?

Performance bonds are common in construction bonding and are usually required for both government and private projects. In government projects, the government is the obligee and is protecting the interest of the public.

Factors to Keep in Mind about Performance Bonds:

  • Good credit history is important. Applicants with bad credit history are considered “high risk” and this can affect their bond approval or bond amount.
  • Surety companies will consider contractor’s experience, financial liquidity, and the state of other ongoing projects.
  • The construction contract must be clear. The surety company pays according to the specifications laid down in the contract. A contract that underestimates the loss of revenue will affect the total amount of compensation for the obligee.

If you are looking for a performance bond, or if you have any more inquiries, don’t hesitate to give us a call.

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