Have a huge project at hand which needs to be put to work urgently? Are you perplexed by the thought of having to deal with contractors who would turn up to deliver shoddy results? Well, don’t break into a cold sweat just yet! For years, matters of work satisfaction and guarantee have been safely kept in the hold of performance bonds. Performance bonds hold up to insure one party, the owner, against another, the contractor, if the latter does not follow the rules of the contract. They make up for defective or incomplete work on the part of the contractor. They are provided mostly in the real estate industry. It ensures the satisfactory completion of any project and keeps complacent contractors at bay. These bonds are issued by a bank or an insurance agency which step in to act as “surety” or a third party guarantor. Payment from the performance bonds can be claimed only by the owner or client and do not carry the risk of being claimed by a third party.
A payment bond, on the other hand, is from the side of the client to the entities involved in the project. It ensures that upon successful completion of the project, all the members- subcontractors, suppliers, laborers get their dues settled. Mechanics’ lien is a bond of a similar nature but cannot be used against public property. Hence in most private projects, payment bond becomes a substitute of a mechanics’ lien. A payment and performance bond go hand-in hand to give an incentive to the labor force to submit quality products.
Aspects of Performance and Payment Bonds
There are some aspects that you need to keep in mind while deciding upon the right kind of bond for your project. It comes down to the time duration, method of completion, the size of the project etc. Performance bonds are calculated on the basis of three primary criteria- Bond Type, Bond Amount and Applicants’ Risk. Surety agencies also have varying demands from clients while issuing bonds like the volume of the project getting insured, capacity of the contractor and assessing the risk factor. They would ask the client to furnish details like copy of the contract, application of surety and at least two years of CPA prepared financial statements. The cost of a performance bond by the rule of the thumb is set at 1% of the contract value but is prone to changes depending on the value of the project.
Talking of Payment only bonds, they are rarely asked for and are typically billed at around 50 percentage of a regular premium. They work in conjunction and provide a three way contract between contractor, owner, and surety. The bond needs to be acquired during the time of bidding and handed over to the owner post project completion.
To get to the basics of what is a performance and payment bond, it is best to visit experts who can guide you from A to Z on bonds and present your best case in front of surety bond companies to minimize risks and losses.