A performance bond is a type of surety bond that guarantees the completion of a contracted project. If the contractor falls short of the signed agreement, the project owner can file a claim for reimbursement. Performance bonds in construction are common but are used in other industries, too. The premium will typically depend on the size of the project and your qualifications.
In the performance bond guide, you will learn:
Definition and Examples
How It Works
How Much It Costs
Performance Bond vs. Payment Bond
Where to Find & How to Apply
Frequently Asked Questions
A performance bond is a type of surety bond often required in contracted projects issued by private businesses or the government. The surety bond protects the project owner by requiring the contractor to meet completion and quality standards. If the contractor falls through, the project owner can file a claim to get reimbursed.
As with other surety bonds, a performance bond is a three-party contract:
Principal: The contractor that needs the bond (you).
Obligee: The business owner, project owner, or government agency requiring the bond.
Surety: The company that issues the bond and guarantees the obligee that you complete the contract.
Let's say a business owner is opening a new location and hires a construction contractor to construct the new building. However, halfway through the project, the construction contractor goes MIA and never completes the project.
Since the contractor failed to complete their end of the contract, the business owner files a claim against the performance bond. The surety confirms the project was never completed and approves the claim. The business owner is reimbursed for their financial loss.
The mainstream requirement of a performance bond originated with The Miller Act of 1935, which required contractors for the “construction, alteration, or repair of Federal buildings” to obtain a surety bond. Today, performance bonds are required for both private- and public-funded projects.
Performance bonds function as a safety precaution against bad contractors. If a contractor falls short of the contract terms — not finishing timely or delivering incomplete or unacceptable work, for example — then the business owner or government agency can file a claim against the bond. Instead of getting stuck with the bad results, they can get reimbursed for any financial loss they suffered.
Like many other surety bonds, a performance bond has three characteristics:
Bond amount: The amount the bond covers and the highest amount the obligee can be rewarded when filing a claim.
Premium: The cost of a performance bond.
Term: How long the bond lasts.
If your client files a claim against you, the surety will file an investigation. Let’s say the surety discovered that you fulfilled your contract terms — the claim will be rejected and you will not be financially liable. But if the claim is true, the surety will reimburse the principal for their losses. After, the surety will collect that amount paid out from you, since you are financially liable.
The premium on a performance bond can start as low as 2% up to 4% — although higher premiums may apply to low-credit and inexperienced contractors. Most bond amount requirements are set for 100% of the contract value. If the contract is for $100,000, for example, then the premium can range from $2,000 to $4,000 (based on a 2% to 4% premium).
TIP: Contractors with higher credit, good business financials, and solid experience will typically qualify for lower premiums.
Other types of bonds have fixed terms usually up to one or two years. Performance bonds are different — the term is for the duration of the project. Therefore, you'd need to obtain a new bond for each new project.
The contract will specify whether a surety bond is required for the job. (In most cases, it is — especially if it’s a government project.) As soon as you learn of the bond requirement, obtain one ASAP since delaying can lose you the contract. No contract = lost revenue.
Keep in mind any required forms the obligee will require for you to use. Government contracts, for example, may require you to specifically file Form: SF25 — this form is reserved for “government contractors and contracting personnel for compliance with and management of financial security requirements in Federal Government contracts.”
Sureties have their internal systems for qualifying applicants. Many will look at your credit score, experience, the value of the contract, and the complexity of the project. A history of completed projects and a record of paying subcontractors and suppliers are green lights that sureties seek in applicants.
Performance bonds and payment bonds often go together (especially in construction projects) but they should not be confused as one and the same.
Performance bonds focus primarily on the completion of the project, ensuring it's fully done and to the expected standard.
Payment bonds ensure that the contractor pays their subcontractors, laborers, and suppliers. Essentially, these bonds guarantee that all parties involved in the contract are paid fully and timely.
For most projects, you'll need to obtain both performance bonds and payment bonds. Some sureties sell them together and market them as "performance and payment bonds" or P&P bonds.
You submitted your bid on a project and won the contract. Congrats! Time to purchase your bond. Performance bonds are often available through insurance companies. When obtaining a bond, you will generally need to take the following steps:
Submit an application with your personal and business information and details about the contract.
Receive a premium quote based on your needs and qualifications.
Pay the premium (or continue shopping around).
Provide proof to the obligee that you are bonded.
Obtaining a performance bond is easy when applying with Worldwide Insurance, Inc. Just fill out our initial application form and get an instant quote in minutes. With rates starting as low as 1%, we issue all types of surety bonds in all 50 states. No credit check required and no obligation.
A performance bond is a surety bond that guarantees the contractor will deliver on a contracted project as outlined in the contract. This can include completing the project by a certain date, to a certain quality standard, and within budget. If the contractor does not uphold the agreement, the project owner can file a claim against the bond to get reimbursed.
The premium on a performance bond typically costs 2% to 4% of the total contract value. For example, a performance bond on a $50,000 contract may cost between $1,000 and $2,000.
The contractor (also called the principal) is responsible for purchasing the performance bond.
When an overrun occurs — the project goes over budget or past the deadline, for example — the principal will need to pay an additional premium to obtain additional coverage from the surety. It goes without saying that you should keep the project owner informed of these types of developments.
Performance bonds last for the duration of the contracted project. The surety may check in with the contractor for status updates. Keep in mind that you'd need to obtain another performance bond for another project if the client requires it.
If the bond has not been sent yet to the obligee, a refund is possible but it will depend on the surety. If the project is already underway, obtaining a refund is unlikely.
Yes, applicants with bad credit can still get bonded. Worldwide Insurance, Inc. works with thousands of business owners and contractors — even those with low credit — to help them meet their bonding requirements.