You’ve just gotten a significant project and are about to begin working on it soon. The obligee or the project’s owner has thoroughly acquainted you with their goals, objectives, and requirements. It’s a vast undertaking, and you cannot wait to begin work since you have secured a job of this scale the first time.
But there’s an impediment. The owner has asked you to provide a performance bond and is adamant that you begin work only after you have provided it. But are you aware of performance bond meaning, and what purpose does it serve? Are there any things you should know before buying a bond? Continue reading to find out.
A short introduction to performance bonds
In the simplest terms, a performance bond guarantees the satisfactory completion of a project. It involves three parties: the principal, surety, and the obligee. The principal is the contractor or the person entrusted with completing the project, while the surety is the company that provides the guarantee and the bond. The project’s owner is called the obligee.
If there is any damage during the construction or you declare bankruptcy, thereby delaying the completion, the owner can rightfully and legally claim compensation from you. The surety company will provide the payment since they guarantee the project’s timely repayment. However, you will have to repay them the amount under an indemnity agreement.
What documents are required to get the bond?
Any surety company will ask you for a few documents when you apply for the performance bond, and some of these are mentioned below. The specific documents may vary from one company to another, so it’s better to obtain the details beforehand.
• Financial statements of your company
• Personal net worth reports (for the owner or owners)
• The contract’s copy between you and the obligee
• Copies of banking terms and conditions
• Professional resume
How are they calculated?
The costs of the performance bonds will also vary from one surety company to another. It costs a rough estimate between 1% to 2% of the total contractual amount. Usually, the higher the coverage level, the more the bond’s cost.
The surety company will also look at the history of your business, its capacity, and capital to determine the pricing. The contract’s duration is another factor that plays a role in the overall price of the bond. The surety brokerage may charge an additional premium if they exceed a year. It is helpful to compare and thoroughly understand the pricing before applying for a bond with any company.
Tips for negotiating a contract bond
You must obtain the proper performance bond, which provides you with the required coverage and reduces the risks associated with the project.
Are the faults explained thoroughly?
Before applying for the contract bond, ensure that you have reviewed the contract in detail and understand your obligations. If they decide to file a claim later on, you can challenge the amount paid to the owner if they haven’t followed their obligations under the contract.
How does a surety company handle the process?
When the obligee or the project’s owner claims a performance bond, the surety company immediately launches an investigation to ensure that certain conditions have been met for its validity.
• They will first determine if the obligee has filed a formal written claim that you (principal) have not adhered to the contract’s terms and conditions.
• The company might also check if you are responsible or default under the contract.
• After they have checked both the things mentioned above, they will investigate whether the project’s owner has fulfilled their part of the terms.
Now that you are apprised of the performance bond meaning make sure to read all the clauses of the contract carefully before signing it. One of the significant benefits of this bond for your business is that it will show that you can be trusted and relied upon to complete a project safely and successfully. Before you go ahead and apply for a performance bond, it is advisable to know the various aspects related to it so that you get the best deal.