A performance bond is one of the most crucial contract bonds used today in the construction sector. It assures the obligee or the project owner that the contractor will complete the project according to the outlined terms in the contract.
The benefits of a performance bond construction cannot be stressed enough as it protects the obligee’s investment from various types of risk. Additionally, it also works as a mark of credibility for the contractor, thereby improving their chances of securing better deals.
Performance bonds are required on federal construction projects that exceed $100,000. These requirements vary between states and local governments. In fact, in some cities, projects costing $20,000 also require performance bonds. Here are the key things to consider when looking to get a performance bond for your up-coming construction project:
How Does a Performance Bond Work?
Performance bonds assure that the contractor will perform the work in accordance with the contract. For example, suppose the contractor gets the project of building a new public library. Consequently, they must sign a performance bond that guarantees the project will be completed as agreed and on time.
If the contractor fails to complete the project or doesn’t meet the quality expectations, the obligee has the right to make a claim against the surety company. After the surety company investigates the issue and determines that the contractor is at fault, it compensates the obligee for any losses incurred due to the contractor’s negligence.
Documents Required
The requirements of surety companies and financial institutions vary depending on the project’s scope, the capacity of the contractor, and the project’s complexity. Most surety companies will request information such as:
- Financial statements prepared by a CPA for at least two years.
- An awarding contract copy.
- Surety’s application.
If you already own a property, it will speed up the process of getting a performance bond.
Cost of a Performance Bond
The cost of a performance bond will be a small percentage of the total bond amount. A bond’s price is determined by the applicant’s credit and bonding history. You will be required to pay a lower percentage if you have a high credit score with no previous claim filing. On the contrary, if your credit score is below 700, you have become bankrupt in the past, or you have already claimed a bond, you may be required to pay a higher percentage.
The cost of a performance bond for construction is also determined by the contractor’s quality and the business’s class. Trustworthy contractors that have a good reputation in the real estate market usually have lower interest rates. On the other hand, if a contractor is expected to offer high-interest rates, it means that there is more risk to the bond company.
The interest rate usually ranges from 0.5% to 3%. Also, it is wise to remember that some surety companies work on a sliding rate scale. It means that the bond rate decreases with the increase in the size of the project.
Conclusions
A performance bond is an excellent way to manage risk in construction. These bonds are widely used in the real estate industry in Canada and allow an experienced contractor to take advantage of financial security. You can benefit from using the services of an experienced construction bond broker who can establish competitive terms and help you understand your obligations.
