What is a performance bond?
How much does a performance bond cost?
What determines the performance bond cost?
How do you get a performance bond?
A performance bond is a type of financial guarantee or surety bond often used in construction and other industries to ensure that a project is completed according to the terms of a contract. It assures the project owner (the obligee) that the contractor (the principal) will fulfill their obligations as outlined in the contract.
In the construction context, a performance bond protects against the risk of a contractor not completing the project as agreed. Suppose the contractor fails to meet their contractual obligations, such as finishing the project on time, within budget, or meeting quality standards. In that case, the project owner can make a claim against the performance bond. If the claim is valid, the surety company that issued the bond will compensate the project owner up to the bond amount. This compensation can cover the costs of completing the project or rectifying any deficiencies caused by the contractor's failure to perform.
Performance bonds are typically required on larger construction projects, government contracts, and projects with high financial stakes. They provide security for both parties involved in the contract, helping mitigate the risks associated with non-performance or delays.
It's important to note that a performance bond is distinct from a payment bond. While a performance bond focuses on the completion of the project, a payment bond ensures that the contractor pays their subcontractors, suppliers, and laborers as required by the contract.
The terms and conditions of performance bonds can vary, and they are typically regulated by laws and regulations specific to each country or jurisdiction.
Performance bonds typically cost 1-3% of the contractual amount. In most cases, the bond amount is the same as the contractual amount, but there are also instances where they differ. We will go into that scenario further in later sections. Below is a chart showing the bond amount and the respective estimated costs:
|Bond Amount||Bond Cost|
|$5000||$50 - $150|
|$10,000||$100 - $300|
|$20,000||$200 - $600|
|$50,000||$500 - $1500|
|$100,000||$1000 - $3000|
|$200,000||$2000 - $6000|
The exact price relies on a few factors, including but not limited to how much the contract is worth, your credit score, and your financial history.
The first thing considered when determining your bond cost is your contract amount. While this does not give an exact price, it does give the range for how much your bond cost could be. Usually, bond and contract amounts are the same because the performance bond guarantees that your clients will be fully compensated.
There are some cases, however, where the bond amount is less than the total contract amount. Surety companies will charge 1-3% of the contract or a higher percentage of the bond amount in this case. For example, let’s say a construction project has a contract amount of $1,000,000 and a bond of $200,000. If they use the contract amount as the base, your bond cost would be between $10,000 and $30,000. If the bond amount is the base, your cost could be 7% or $14,000.
When a contractor or business applies for a performance bond, the surety company issuing the bond will assess the financial stability and creditworthiness of the applicant. This assessment helps the surety company determine the level of risk involved in providing the bond. The cost of performance bonds can vary based on the applicant's creditworthiness. Contractors with higher credit scores might qualify for lower premium rates because they are perceived as lower-risk clients.
A contractor's financial history can influence a performance bond's cost. When a surety company evaluates a contractor's financial history, they assess the contractor's ability to fulfill their contractual obligations and complete the project. Much like the personal credit score, the financial performance of a contractor allows the surety to assess your company's risk. Sureties usually look at your financial statements, working capital, track record, industry reputation, and other factors. If you are deemed high risk, your bond cost will be higher than if you are deemed low risk.
First, determine who your surety company will be to get a performance bond. SuretyNow presents a hassle-free answer to acquiring your performance bond. Simply complete our brief 3-minute form, and we'll initiate sourcing the optimal quote for you. The form will prompt you to answer questions about yourself and your company. Be prepared with information like your Social Security Number, financial statements and assets, business plan, and other documentation.
After filling out our form, expect to receive the quote via email within an hour. The bond cost will be included in the email. Once you’ve paid the bond, you will receive your bond through your email!