Basics to Know Before Getting a Performance Bond


A performance bond is a surety bond issued to guarantee that a contractor will deliver satisfactory project completion. When someone hires a construction company or a contractor to undertake a project, how do they ensure optimum performance?

Having performance bonds serve as an assurance that a contractor will adhere to all facets of a project as per the terms and conditions of the contract. If you are a business owner looking forward to getting a performance bond, here is a guide to give you complete information about getting one:

What is a Performance Bond?

Many project owners and developers rely on a performance bond to ensure that their hired contractor will meet their contractual requirements and obligations. The surety bond is a document that guarantees the satisfactory performance of a contractor. Those who fail to meet the required performance standards have to face legal proceedings and compensate for the owner’s loss.

Importance of a Performance Bond

As a business owner, you need to acquire a performance bond before starting a construction project. Before you pursue a project, you have to submit a bid bond in which you agree to secure a performance bond before starting the project.

Different types of projects involve varying levels of risks. Even a minor defect can result in a massive loss for the project owner. A performance bond is a great way to protect them from specific risks to some extent. A performance bond makes the oblige responsible for their mistakes and compensate for any loss done to the owner.

Requirements for Getting a Performance Bond

To get a performance bond, you have to get in touch with a surety bond provider who can provide you the bond at reasonable rates. Apart from that, they also give you complete information about the bond and its conditions and offer reliable claim support. While obtaining a performance bond, you will need to provide the following:

  • Project details, like the bid amount, type of project, and funding source
  • Personal and company details, like bonding history, experience in the industry, personal credit rating
  • Financial details of your business, like balance sheet, cash flow statement, income statement, work schedules, notes, disclosures, etc.

For smaller projects, you may get a performance bond based on your tax returns only. But for projects worth more than $350,000, you will need to submit a variety of documents, including your credit check, contractor questionnaire, bid or contract invitation, business financials or current and previous year, bank letter, and personal financial details of the owners.

Cost of a Performance Bond

The cost you have to pay for obtaining a performance bond depends on several factors, including the bond amount, project size, project location, surety provider, and the principal’s credit and financial status.

Your history of job performance also matters a lot in determining your bond cost. Also, keep some money assigned for commissions, credit report fees, overnight charges, and other operating costs.

Although the performance bond cost varies from one contract to another, it is usually 1-5% of the total contract amount. The better your credit history and financial status you have, the less you have to pay.

 Generally, larger contracts charge fewer premiums, while smaller projects have a higher rate of premium. It would be best to find a surety bond provider who can deliver you the best performance bond at the lowest rates possible.

Steps to Obtain a Surety Bond

First of all, you have to contact a professional surety bond broker or agent. They assess your surety capacity and offer you expert help throughout the contract process. Depending on the project needs, they require you to submit a few documents and pay a certain amount of fees.

Once you have applied for the bond and provided all the information they need, they deliver the bond depending on the contract size. Basic information would be enough to obtain a bond for smaller projects. Still, for bigger ones, a contractor typically goes through a comprehensive surety underwriting process, referred to as the three Cs – Capital, Capacity and Character.

The bond provider uses the given information to determine risk and your likelihood to pay surety if needed in any bond size. Applicants with bad credit scores may also receive a surety bond but may be at a higher premium rate.

Choosing the Right Bond Provider

It is crucial to choose a bond provider who provides you a bond in a hassle-free manner. The application process should be easy, document requirements should be minimal, and they must give you complete guidance while settling a claim.

Get in touch with a surety bond specialist experienced in making and delivering different types of performance bonds in varying industries. Don’t forget to pay attention to their customer service, as you may need their guidance at different stages of a contract.


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