A Performance Bond ensures the satisfactory completion of a project by the Principal in whose name the bond is issued. Generally these are used in public construction and commercial projects.
How do Performance Bonds Work?
The insurance or surety company issues a Surety Bond known as the Performance Bond. The contractor is known as the Principal who is liable to fulfill the contract according to its specifications. If the Principal fails to do so it becomes the responsibility of the Surety Company to complete the project or have it completed. Apart from Civil projects, Performance Bonds are usually required for projects in excess of $250,000.
How are Rates for Performance Bonds Determined?
The type of work, the estimated duration of the project, and the warranty on the work being done all go into determining the rate of the Performance Bond. Surety companies see many types of contacted work including excavation, concrete work, engineering construction, and architectural construction.
The overall credit worthiness of the contractor may impact the rate. The stronger the credit, the lesser the rate is likely to be. The Surety Company will look at many financial statements including balance sheets, income statements, cash flow statements, and a work in progress schedule when evaluating an application.