Does Your Construction Business Need a Performance Bond?

Does Your Construction Business Need a Performance Bond?

Far too often we hear stories of shady construction companies doing a poor or incomplete job, blew the budget and missed the deadline.  Rarely do we hear about the companies doing good work that is completed on time and on budget.  The next time you ask yourself “does your construction company need a performance bond” reflect on the horror stories you have heard and understand this is a way to avoid them.

What are performance bonds?

Performance bonds involve the construction company, the client and the surety or insurance company.  What they do is make sure that the construction company sticks to their end of the agreement and completes the job they have been hired for.  If you hire a construction company to build you an office building or a shopping mall this guarantees that the money that you pay him is used to work on the project and not to fund his trip out of the country.

How do they work exactly?

If we use the office building example and your agreed upon contract states that the builder will build you an office building for 1million dollars.  At this point the contract would contact the surety or insurance agency and take out a performance bond.  Then the insurance company would look at three different factors including:

  • Type of bond (performance bond in this case)
  • The amount of the bond (1 million in this case)
  • Contractor’s Risk (previous contracts and whether they were completed)

At the end of the day the contractor will meet the criteria of a performance bond or they won’t.  If you’re contractor does your project without a hitch, then that’s great.  But, if they take too long or cost you more than the contract states the performance bond can help.

How much will your performance bond cost?

The cost is going to depend almost exclusively on the contractor’s risk.  If you work with a well-known contractor who has a great reputation and has previous dealings with an insurance company then the cost of the performance bond will be much lower.  The contractor will be looking at a cost of 1% or less of the total bond amount, a new contractor may be looking at up to 5% of the total bond amount.

Does your construction business need a performance bond?

This largely depends on the type of work that you want to do.  For small residential projects you probably won’t need a performance bond.  However if you want to do any type of large residential projects or virtually any type of commercial construction then a performance bond is a must.  Bear in mind it is always better to be safe than sorry.