Performance Bond: What Should You Need To Know?

Performance Bond

Did you know that about 30% of all construction projects require a performance bond? If you’re in the construction industry, it’s essential to understand what it is.

So, what is a performance bond and how does it work?

It is a three-party agreement between the owner, contractor, and the surety company. The surety company agrees to pay the owner if the builder fails to complete the project or meet the contract terms.

The contractor is responsible for obtaining a surety bond from a surety company. The premium for the bond is typically a percentage of the total contract price and is paid by the contractor.

What is a performance bond, and how do they work?

It is a surety bond often required to obtain a construction contract. Such bonds aim to protect the project owner in case the contractor fails to finish the job as specified in the contract. This is like insurance for the owner and gives them some financial recourse if the contractor fails to fulfill their obligations.

In most cases, the contractor pays the premium, and it is typically a minor percentage of the project’s total value. If you are interested in obtaining a construction contract, it is essential to be aware of the potential need for a bond.

Related Resource: Six Useful Tips On How To Organize Your Construction Business

What are the key benefits?

Performance Bond benefits

There are several benefits of having a bond in place.

  • First, it protects the project owner from financial loss if the builder fails to complete the work. It also offers some peace of mind, knowing that there is a safety net if something goes wrong.
  • Second, it can help to ensure that the project is completed on time. The surety company that issues the bond will often have a vested interest in ensuring that the project is completed on schedule. This can be beneficial to both the owner and the contractor, as it can help avoid costly delays.
  • Third, it can help ensure that the work is completed to a high standard. The surety company will often have strict requirements for the quality of work to be performed. Hence, this bond motivates the contractors to exceed the project owner’s expectations.
  • Fourth, one of the most important benefits of a bond is that it can help protect the owner’s investment. If the builder defaults on the contract, the surety company will often step in and complete the project. This can help the owner avoid losses.

Who can benefit from a performance bond?

»Mechanical/HVAC/Plumbing Contractors:

Many times, these contractors must have a surety bond to obtain a construction contract. This is because the work they perform is often critical to the function of the building.

»Electrical Contractors:

Like mechanical/HVAC/plumbing contractors, electrical contractors are often required to have a bond. This is because their duties are essential for the building’s operation.

»Sewers and Watermains Contractors:

There are many times when these contractors need to have a bond. They are often required to have one to obtain a construction contract.

»Road paving contractors:

If a highway paving contractor wants to obtain a construction contract, they will likely need a bond.

In general, any contractor performing work that is essential to the function of the building will likely need to have this bond.

Now that you know the answer to, “what is a performance bond?” it’s time to look at when it is required.

When is this bond required?

When is this bond required

In most cases, it is required when the value of the project is over a certain amount. The specific amount will vary from state to state, but it is typically around $100,000. In some cases, the surety company will require a bond for projects valued at less than this amount.

It is crucial to note that the project owner is not the only one who can require a bond. In some cases, the company providing the bond will also require it. This is often the case when the project is high risk or when the contractor has a history of defaulting on their obligations.

What are the consequences of not having a performance bond?

Are you a business owner thinking about whether or not you need to get a performance bond?

You may also be wondering what the consequences of not having a surety bond will be. Here are a few consequences:

  • You may have difficulty getting new contracts. Many companies will not do business with you if you don’t have a bond.
  • Another drawback is that you may have to pay more for insurance. This is because companies that insure you will be taking on more risk by insuring you without a bond.


So, there are a few consequences that you should be aware of if you decide not to get a performance bond. If you’re thinking about whether you should get a bond or not, remember to weigh the pros and cons and see how much of an impact it can make financially.

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