As a contractor with some experience, you may have decided to bid on a public construction project for the benefits it offers. That’s great news. But keep in mind that for bigger projects the municipal, state, or federal government may impose a performance and payment bond requirement.
Whether this is your first encounter with these bonds, or you have posted performance and payment bonds before but aren’t exactly sure what they are, we’ve got you covered with this guide. We’ll try to answer some common questions about them plus we’ll explain how they can be obtained and how you can save money on your bond rate.
What are performance and payment bonds?
Performance and payment bonds are a type of surety bonds, required by the Miller Act, for work on public projects exceeding $100,000. Along with bid bonds, these are two types of construction bonds that are most often required for public projects.
Even though they are frequently underwritten together as a performance and payment bond, they represent two separate bonds—a payment bond and a performance bond. Like all surety bonds, they are issued by a surety bonds company, which backs an agreement between you and the owner of the project concerning the job you are going to do on the site.
Why are performance and payment bonds required?
Performance and payment bonds are almost always required together, but they protect against different things. A performance bond guarantees that once you win the job, you will do it properly, as specified in the contract. Payment bonds, on the other hand, are there to protect all workers that you hire—suppliers, subcontractors, laborers—and guarantees they will get paid.
So what happens if you violate the terms of your payment or performance bond? You can have a claim filed against you, which could damage your business.
How much do performance and payment bonds cost?
Because of their function, and how their costs are calculated, surety bonds are often compared to insurance. A surety bond differs from insurance in that it doesn’t protect you, but rather the people you work with.
Similarly to insurance, there is a total bond amount, which represents the dollar amount up to which someone making a claim against the bond can be compensated. The total bond amount will be determined based on the size of the project you are undertaking. The premium, again as is the case in insurance, is the percentage of the total bond amount that the bonded individual pays to the surety. The surety vouches that the holder of the bond is trustworthy, financially stable, and capable of finishing the project.
Surety bonds companies determine your premiums based on your personal credit score, which for them is a way to measure the risk they are taking by underwriting the bond. After all, if you cause a claim, they will be responsible for paying it back before they come to you for compensation. If your credit score is very low or you have other credit issues, you may not be eligible for a performance and payment bond at all.
Money-saving tip: Sometimes sureties are willing to reduce premiums if the candidate sends out financial statements demonstrating liquid assets and financial strength, or a resume that shows industry experience.
What happens if you get a claim against the bonds?
Contractors are always advised to avoid bond claims at all costs, as they severely hurt the reputation of their business and reduce their chances of getting contract bonds again, meaning they will miss work opportunities. They will also have to reimburse the surety for all of its expenses incurred by the claim, including legal fees.
To avoid claims, it’s best to always stick to the terms of the contract you signed, and do your best to solve arising disputes before they turn into claims. Don’t be afraid to talk with your surety agency if a problem arises. They might have advice for resolving the issue before it escalates. In the case of an inevitable claim, keep documentation from every part of the dispute as this will help in court.
Did this article answer your questions regarding performance and payment bonds? Feel free to ask more in the comment section below.
Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping contractors get bonded and start their business.