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The construction world can be complex and carry a high risk for all parties. Over the years, laws and regulations have evolved to protect the various parties involved. One of the biggest is the requirement of contract bonds to comply with public legal requirements and some private sector financing arrangements. Two types of bonds in construction commonly required include payment and performance bonds. Here we review everything to consider for performance bonds so you can understand why you may need one and apply for an instant bond with Simpli Surety for your project.

What is a Performance Surety Bond?

A performance bond in construction is a type of surety bond that owners or qualified contractors purchase to ensure that the contractor will complete the project following the contract terms. If the contractor fails to meet the terms of the contract to satisfactory completion, the bonding company will be responsible for completing the project.

A performance bond is essential because it helps protect the owner or contractor from financial losses if the contractor fails to meet the contract terms. It also helps ensure that projects are completed promptly. Performance bond requirements apply for nearly every public construction contract over $100,000.

What is a performance bond in construction contracts?

A performance bond in construction contracts is a type of surety bond that guarantees a contractor will complete the project as agreed and meet all contractual obligations. If the contractor fails, the Surety issuing the performance bond will often step in to finish the job.

What is the difference between a performance bond and a payment bond?

A performance bond and a payment bond are two different types of contract bonds. A performance bond guarantees that a contractor will complete the project as agreed, while a payment bond guarantees that subcontractors and suppliers will be paid for the work they do on a project.

What are Performance Bonds for service contracts?

Performance bonds can be used for service contracts, including trash collection and maintenance contracts. Like construction bonds, service contract surety bonds ensure proper work performance in compliance with the agreement. These surety bonds are written over a period that corresponds to a specified service contract period. After the service period, the obliged party has the right to terminate the service agreement.

Contractor Performance Bond Alternatives

Depending on the nature of your work, you can post the total amount of your contract performance bond in cash as collateral for any job you need (these are often called cash performance bonds). The owners usually don’t take cash directly, but you can ask your bank to give you an irrevocable letter of credit (ILOC) which serves the same purpose. Posting cash collateral or an ILOC drains cash, and you know the availability of cash is essential to any business’s survival.

Performance Bond Basics

How Performance Surety Bonds Work?

There are several reasons why an employer might request a performance bond. One reason is that the employer wants to be sure that the contractor will complete the project on time and within budget. Another reason is that the employer may not have the resources to complete the project if the contractor fails.

Performance surety bonds are a type of financial guarantee that ensures a project or contractual obligation is completed as agreed upon. They provide protection to the project owner or obligee by guaranteeing that the contractor or principal will fulfill their obligations according to the terms and conditions of the contract. In the event that the contractor fails to meet the agreed-upon requirements, the surety bond will provide compensation to the obligee to cover any financial losses or damages incurred.

Performance surety bonds are typically obtained by contractors as a requirement for bidding on and undertaking large construction projects, government contracts, or other ventures where the performance and completion of the project are critical. By offering financial security and peace of mind, performance surety bonds serve as an effective risk management tool for all parties involved in a project.

Three Parties to a Performance Bond

A bid bond typically involves three parties:

1. The Principal

The awarded contractor.

2. The Obligee

The Owner or developer of the construction project.

3. The Surety

The insurance firm that issues the bond to the Principal.

While the primary objective of a bond is to benefit the owner, performance bonds may be helpful on any construction project. A performance bond is critical to keeping steady cash flow and avoiding delays or work stoppages on a project when a prime contractor goes bankrupt or defaults.

A performance bond claim indicates that something has gone wrong on the project, and contractors cannot fulfill their obligations. This may imply the failure of the whole endeavor for subcontractors and suppliers and their payments.

A performance bond claim implies that surety companies must pay money to ensure the project is completed (and recoup losses from the contractor via indemnification) or source another contractor to complete the work.

The purpose of the performance bond is to ensure the job gets done one way or another to a satisfactory completion.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

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What does a performance bond cover?

Performance guarantee bonds cover the bonded parties’ underlying obligations to perform according to the terms of a contract. If the project owner suffers due to the failure of the bonded party, it may be able to make a claim on the performance bond to recover financial damages.

If the claim is legitimate, the surety company guarantees that the project owner will pay the money. On the other hand, the contractor is not excused from its responsibilities under the contract. Whenever the surety company steps into a settlement, if it is required, the principal applicant must repay the Surety for its losses incurred. This is governed by the indemnity agreement, which essentially states the Surety has rights to recover against the applicant in the event of default.

What is the benefit of a performance bond?

A performance bond guarantees that the contractor has some “skin in the game,” meaning that they’re not just going to walk away from the project if things get tough. The performance bond guarantees that the contractor will do whatever is necessary to finish the job. It also offers some protection to the hiring party in case of any legal issues or disputes that may arise.

So, in short, a performance bond provides peace of mind that the project will be completed, and it can help avoid costly legal disputes down the road.

What happens when a performance bond is called?

When a performance bond is called, the surety agency is contacted, which then brings in the surety company that issued the bond to step in to ensure the project is completed. This usually happens when the contractor fails to meet their obligations as specified in the contract, such as failing to show up for work, not completing the project on time, or exceeding the budget.

In most cases, if the contractor can fix the issue that led to the performance bond being called, the surety company will release them from any wrongdoing. However, if the contractor cannot rectify the situation, the surety company will either finish the project themselves or hire a new contractor to do so.

What happens in a Performance Bond Claim?

If the contractor does not deliver, the owner may request compensation from the performance bond to recoup expenses and damages. If there is a genuine claim, the Surety on the performance bond steps in and takes appropriate action.

If a claim is filed, the Surety will conduct an investigation. This is to determine whether there has been a genuine breach and the extent of the losses.

Typically, the Surety will evaluate the work that must be done any modifications required and may locate and hire a new contractor to complete the project. The performance bond claim is generally included with the termination of an original contractor. Termination, however, is not always a simple process.

The owner may try to prevent the contractor from being thrown off the job. Terminating a contractor or sub is a time-consuming and costly procedure for both the contractor and the customer. If an agreement can’t be reached, the Surety will be required to step in and complete.

Each bond has its own set of rules that must be followed for a claim to be valid and frequently includes a required notification of default. If the terms are not followed, the Surety has the authority to reject the claim.

While the performance bond is meant to safeguard the owner from contractor failure, the Surety has much power in determining how to fix it. In certain situations, they even have the authority to reinstate a defaulting contractor without the owner’s consent.

Preventing a Performance Bond Claim

Avoiding a claim requires contractors not to default on their obligations. Even the most qualified contractor, however, might encounter an unforeseen issue. So, what should a contractor do if they suspect they won’t be able to complete the work? Contact the surety agency and surety company.

How will a Surety Company respond? 

If the contractor ultimately goes into default, surety companies must decide how to respond. There are a few choices for the bonding company when it comes to handling claims.

  1. The Surety will pay the Obligee the lesser between the bond amount and project cost to complete.
  2. A surety may finance the contractor’s remaining work if the project is near completion. 
  3. A replacement contractor will be put in place by the project owner to complete at the expense of the Surety. 
  4. The Surety directly installs a substitute contractor and funds the project to completion. 

The Surety must ultimately reimburse the contractor for any money paid out. That’s why good communication is so essential when dealing with bond claims. When encountering difficulties, contractors should always attempt to find other options before a problem becomes irreversible and well before a claim is filed.

If the contractor drops work halfway through, the owner may claim the bid bond’s face amount as compensation for any extra expenses incurred in obtaining another worker to complete the job. In most situations, an owner can seek reimbursement of up to a bid bond.

The performance bond and its corresponding indemnity agreement enable the surety bond company to recover monies paid out on a claim from the absconding contractor. This is the risk the surety company accepts in exchange for backing the contract and paying a premium or surety bond fee.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

How much does a Performance Bond Cost?

Surety bond costs vary depending upon several key factors. The two primary criteria commonly used by Surety when considering cost are the bond amount and creditworthiness of the applicant. Rates typically range between 1% and 5% for a single project.

How do you calculate the cost of a performance bond?

Larger contractors usually have sliding scale ratings. The larger the project, the rate declines. However, costs may vary widely between different companies depending on their financial capacity, history, their credit history, among others.

Performance Bond rates explained.

The percentage you must pay on the contract is called a contract rate, and this can vary depending upon what line of work you are doing or where your work is done. Surety companies have different performance bonds in different states based on the type of work needed for the bond, such as concrete construction, architectural construction, engineering construction, or excavation. Though exceptions exist, rates vary between surety companies, since surety companies have different appetites for certain types of bonds in construction.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

How Does a Surety Company Underwrite Surety Bonds?

The surety company must first assess the risk involved to issue a performance bond. This assessment is made by reviewing the Principal’s credit history and financial stability. The surety company will also review the project itself to ensure that it is feasible and that the contractor has the experience and resources to complete it.

The process of underwriting a performance bond is complex, and there are many factors that the surety company will consider.

  • The surety company will review the Principal’s credit history and financial stability
  • The surety company will review the project itself to make sure that it is feasible
  • Does the contractor have the experience and resources to complete it?
  • Is the bond amount is appropriate for the project?
  • Is there a performance and payment bond in place for the contractor’s subcontractors?
  • Is the contract is with a reputable company or project owner?
  • Are there liens against the property or project site?
  • Does the contractor have a history of completing projects on time and within budget?

What about other types of construction bonds?

Contractors usually must submit bid performance bonds to the initial package of proposals before the contract has been awarded. Bid bonds guarantee the obligation to pay for performance and payment when the contractor has won the contract or incurred an extra cost. Payment Bonds ensure that subcontractors, vendors and suppliers are paid, particularly important in government jobs because liens against a private property can never exist.

What is a payment bond?

The payment bond guarantees the contracting party’s payment of labor, materials suppliers, and contractors by the contractual obligation.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

How Does a Surety Company Underwrite Surety Bonds?

The surety company must first assess the risk involved to issue a performance bond. This assessment is made by reviewing the Principal’s credit history and financial stability. The surety company will also review the project itself to ensure that it is feasible and that the contractor has the experience and resources to complete it.

The process of underwriting a performance bond is complex, and there are many factors that the surety company will consider.

  • The surety company will review the Principal’s credit history and financial stability
  • The surety company will review the project itself to make sure that it is feasible
  • Does the contractor have the experience and resources to complete it?
  • Is the bond amount is appropriate for the project?
  • Is there a performance and payment bond in place for the contractor’s subcontractors?
  • Is the contract is with a reputable company or project owner?
  • Are there liens against the property or project site?
  • Does the contractor have a history of completing projects on time and within budget?

What about other types of construction bonds?

Contractors usually must submit bid performance bonds to the initial package of proposals before the contract has been awarded. Bid bonds guarantee the obligation to pay for performance and payment when the contractor has won the contract or incurred an extra cost. Payment Bonds ensure that subcontractors, vendors and suppliers are paid, particularly important in government jobs because liens against a private property can never exist.

What is a payment bond?

The payment bond guarantees the contracting party’s payment of labor, materials suppliers, and contractors by the contractual obligation.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

What’s required to get performance bonds?

 

To obtain the performance and payment bonds required to bid on a project, you’ll need to demonstrate that you are capable and creditworthy. This is typically done by providing the surety company with a complete underwriting package, such as historical financial statements for your business that demonstrate that you have sufficient working capital, cash flow, equity, and profit.

The accountant prepared financial statements to include, but are not limited to:

  • Balance sheet
  • Income statement
  • Cash flow statement
  • Complete notes and disclosures
  • Work in progress schedules (WIP)

You must also provide completed projects, subcontractors, material suppliers, and banking references.

Simpli Surety simplifies this process and issues these project bonds instantly up to $750,000 with only a credit check and up to $3,000,000 with the inclusion of in-house financials.

Who provides a performance bond?

A surety company usually provides a performance bond, but banks can issue its performance guarantee equivalent in a letter of credit. This is often the case internationally, where surety bond law is less developed.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

Performance Bond Claim Scenarios

The owner can file a claim against the performance bond if the contractor does not perform. The surety company steps in and takes corrective action if there is a valid claim.

If the project owner files a claim, the Surety will investigate. This is to establish whether there has been a genuine breach and the extent of the losses.

Each bond has its own set of rules that must be followed for a claim to be valid and frequently includes a required notification of default. If the terms are not followed, the Surety has the authority to reject the claim.

Surety Company Response

If the contractor ultimately goes into default, surety companies must decide how to respond. There are a few choices for the bonding company when it comes to handling claims.

  1. The Surety will pay the Obligee the lesser between the bond amount and project cost to complete.
  2. A Surety may finance the contractor’s remaining work if the project is near completion. 
  3. A replacement contractor will be put in place by the project owner to complete at the expense of the Surety. 
  4. The Surety directly installs a substitute contractor and funds the project to completion. 

The performance bond and its corresponding indemnity agreement enable the surety bond company to recover monies paid out on a claim from the absconding contractor. This is the risk the surety company accepts in exchange for backing the contract and paying a premium or surety bond fee.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

How to Get a Performance Bond

The Performance Bond Application process

The Simpli Surety process to get a performance bond is quick and easy. Fill out our single-page instant performance bond application. Submit your contact, project, and company information along with your credit score, and qualified applicants will be approved and bonded in a matter of minutes for projects up to $750,000.

For larger projects up to $3,000,000 and using our same automated underwriting process with submission of in-house financials, we can have you bonded in no time as well.

Writing the Performance Bond.

Once approved, we’ll email you a copy of the bond and, if required, an indemnity agreement for signature. Once signed and the premium payment is made, the official bonds will be sent directly to the Obligee. That’s it. You’re bonded!

Get Your Performance Surety Bond Instantly

Simpli Surety combines top surety experts with cutting edge technology to serve you the best bonding experience in the industry online.

Performance Bonds FAQs

Performance surety bonds are typically obtained by contractors who are bidding on and undertaking large construction projects, government contracts, or other ventures where the completion and performance of the project are critical. They may also be required by private clients or businesses as a risk management measure.

Surety companies evaluate various factors before issuing a performance surety bond. These may include the contractor’s financial stability, experience in similar projects, creditworthiness, and reputation. The surety company assesses the contractor’s ability to complete the project successfully and meet the contractual requirements.

The cost of a performance surety bond varies depending on several factors, such as the size and complexity of the project, the contractor’s qualifications, and the bond amount required. Generally, the premium for a performance surety bond ranges from 1% to 3% of the bond amount. It’s important to obtain quotes from different surety companies to find the most competitive rate.

No, performance surety bonds and payment surety bonds are two separate types of bonds. While a performance surety bond guarantees the completion of the project, a payment surety bond ensures that subcontractors, suppliers, and laborers are paid for their work on the project. Both bonds may be required simultaneously, depending on the project’s specifications.

A performance surety bond typically remains in effect until the project is completed and accepted by the project owner or obligee. However, the exact duration may vary depending on the terms of the contract and the specific requirements of the project.

A performance surety bond cannot be canceled by the contractor. It is a legally binding agreement between the contractor, the project owner, and the surety company. If the contractor fails to fulfill their obligations, the surety company may be obligated to compensate the project owner up to the bond’s specified amount.

No, performance bonds can be used in various contracts, not just construction contracts. Some typical applications for performance bonds include contracts for the supply of goods, the provision of services, and the sale of real estate.

Yes, performance bonds can be used in both domestic and international contracts.

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Our staff is happy to help guide you on what you need and answer any questions. Contact us directly to speak with one of our agents.

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