A performance bond, also known as construction bond, provides an owner with a guarantee that their construction project will be completed per the terms of the contract. The performance bond is issued by a bonding company, also referred to as the surety, on behalf of a contractor. There is usually a one year warranty period as well that the construction bond covers if it’s included in the contract. If the contractor completes the work to the owner’s satisfaction and satisfies the warranty period up to one year, then the surety no longer has any obligation under the performance bond.
The limit of liability on the performance bond is typically 100% of the contract amount. If there’s a claim, the surety can elect to complete the remaining portion of the contract or they can simply pay the penal sum amount of the bond. In most cases, the obligee must a file performance bond claim within 2 years from the date of completion or the construction project.
A performance bond is NOT an insurance policy. If the surety pays a claim on a performance bond they’ll look to the contractor for reimbursement. This can be confusing because it’s usually a large insurance company that acts as the surety, but it’s really a lot more like getting a line of credit at a bank than getting insurance. You’ll sometimes hear that a contractor has a “Surety Line of Credit” which means they have an established program that allows them to bond a certain amount of work.
Although the contractor is responsible for posting the bond, the performance bond is written to the benefit of the owner which can be the federal government, a private entity, a State or municipality, or any other entity that contracts work to be performed. If it’s a public entity then per the Miller Act of 1932 and other subsequent legislation, performance bonds are required on bonds exceeding $100,000 with few exceptions. In the case of federal construction projects, the Federal Acquisition Regulation (FAR) Part 28 requires performance bonds only on contracts that exceed $150,000
Can Baldwin Cox Allen help with performance bonds?
We can absolutely help! Baldwin Cox Allen has been specializing in performance bonds for contractors since we opened our doors in 1989. We have access to over 30 well established and “A” rated sureties and we’ll search the market for the right fit for your unique needs. We’ll work hard to get the bonds approved for you, and then continue to work to improve your program and maximize your bonding capacity!