Exactly why Performance Bonds Are Vital
What are performance bonds?
Unlike contractors license bonds, a performance bond is a surety bond issued by an insurance company to guarantee completion of a specific project by a contractor. For instance, if a performance bond has been issued, and the contractor fails to construct the building to the exact specifications of the contract, the client is guaranteed reimbursement for any monetary loss in the amount of the performance bond. Many times the failure to complete is due to bankruptcy of the construction company.
Many times performance bonds are issued in conjunction with a payment bond that guarantees the contractor will pay all required labor and material costs.
Why should a performance bond be required?
For many civil projects, performance bonds are required by law. Contractors working on federal projects are required to post two bonds by the Miller Act. These are a performance bond and a labor and material bond. Following the federal government's example, many states require similar bonds to work on public works projects.
Another reason to require a performance bond is that as the owner, you are guaranteed that the construction company you hired is capable of completing the project to your specifications. The insurance company issuing the bond will do a thorough analysis of the construction company prior to issuing a bond. In the event that the contractor defaults, the bond guarantees the contract will be fulfilled. Unfortunately, one of the dirty little secrets of the construction industry is that there is a 30% failure rate. If a performance bond is not required, you run the risk of losing your money and being stuck with a building that is only partially completed.
How do you obtain a performance bond?
If you are the owner having a building constructed you simply need to include the requirement of obtaining a performance bond in the project's contract. It is the responsibility of the winning construction contractor to obtain the performance bond. The construction company will be required to inform the bond company of the amount of the bid, the bid date, whether they have been previously bonded, the number of years they've been in business and their personal credit score. Some companies will require further financial information to obtain a larger bond. For projects under $500,000, most bonds can be secured in as little as 48 hours and must be issued before work can begin.
You can learn more here at Unitedsuretybonds. As a bond industry leader, they can answer all your questions and assist you with all your bond needs.