What Is A Performance Bond Guarantee?

March 26th, 2018 | by Mack A
What Is A Performance Bond Guarantee?

The success of a construction project depends upon the contractor’s ability to complete it and deliver the right quality. Since investments go high, there is a need for a security to assure project completion. A performance bond guarantee is a form of financial surety that guarantees the full and due completion of the contract according to the specifications and plans. An insurance company or a bank issues this guarantee to the contractor. The purpose is to cover the risk for the project owner as it guarantees compensation in the event of non-performance.

A performance bond guarantee is a written agreement that involves three parties:

  • Principal: The principal is the person who requires the bond (in this case, the contractor)
  • Surety: The surety is the person who issues the bond (in this case, the surety company)
  • Obligee: The oblige is the person protected by the bond (in this case, the project owner)

Usually, such bonds are taken for large-scale public projects such as construction of roads, bridges and government buildings. However, private projects may also require them in some cases. A project that requires a performance bond guarantee usually requires a bid bond too. The contractor first has to bid for the project. Once his bid qualifies, he has to take the performance guarantee before the initiation of the project. In case the contractor fails to complete the project, the surety steps in and ensures the completion for the obligee.

The Use Of Performance Bond Guarantee

The main purpose of a performance bond guarantee is to protect the project owners from the concerns related to non-completion. This may happen due to the contractor going bankrupt before finishing the contract. There could be other reasons such as low-quality work resulting in non-adherence to the construction contract. In such a scenario, the obligee can claim compensation against the performance bond to cover the damages owing to non-completion.

Performance Bond Premium 

Now that the concept of performance bond is clear, it is important to understand the costing of such bonds. The cost of the bond is in the form of the premium that varies according to the project size. Generally, the premium ranges between 0.75% and 3% based on the contract amount. For instance, bonds under $ 250,000 are charged a rate of 3%. A graduated scale is used to calculate the premium rates for bonds over this amount.  The premium value is also determined by the credit rating of the company. Those with bad credit will be charged a higher rate than the ones with high credits and a good market reputation.

Getting a performance bond is an essential business operation for contractors. They require going though certain formalities for the job. However, it has now become simpler to obtain them with the help of online providers such as https://swiftbonds.com/performance-bond/. All you need to do is to fill a bond application and these providers take care of the rest of the formalities. Thanks to these sites, getting a performance bond guarantee has become as easy as a click of the finger.