If you are like most people, you are probably wondering what a performance bond is. Well, you did not need to worry because, in this article, we are going to tell you everything you need to know about it.
A performance bond is also known as a surety bond. It is commonly used in public construction. This is hardly surprising considering that the law requires all public projects that are worth at least $100,000 to be protected by a performance bond. Yet it is also required of private construction projects especially for those that have a general contractor.
But performance bonds are not limited to the construction industry. As a matter of fact, there are 25,000 types of performance bonds or surety bonds and they cover different amounts across different types of industry. For example, the commodities trading industry requires for sellers to have a performance bond in case they are unable to deliver goods, or fall short of their contracts, to the buyers.
Performance bonds are paid for by the contractor and they go alongside payment bond. A performance bond is paid to project owner while a payment bond is paid to the subcontractors and the workers of the project.
Do you need a surety bond? There are many surety bond companies out there that can help you and the site Legal Aids And The Law should your first stop. The first thing you need to do is to find one in your industry. A surety bond pretty much works like an insurance plan whereby you pay premiums for a certain bond amount. How much you pay in premiums really depends on the bond amount and the risk involved.
Since it is used as a cushion against the risk, the riskier the project is, the more the buying company needs to pay. Or, if the buying company is at risk of insolvency or bankruptcy, the higher the premiums will be.
In actual practice in construction and public works, contractors are required to make a bid bond as they are bidding on projects. When they do win a project, it is only ten that a payment and a performance bond is required, which is issued in the name of the project owner as a security for project completion.
In most cases, claims are never made. However, there are times when a contractor fails to complete the construction of a building or build it in according with the specifications indicated in the contract. This is usually because of a bankruptcy filing. The project owner can be paid the full amount indicated in the performance bond.
As we said earlier, a performance bond always goes hand in hand with a payment bond. But this wasn’t always the case. It was only in 1932 when the Miller Act was signed that all construction contracts by the federal government were required to be protected by a performance and payment bond. Different states have enacted so-called Little Miller Act statutes as well, requiring the same protection on state-funded projects.