There are a couple types of bonds. The two most common are performance bonds and payment bonds, and it’s important you know the difference.
Before we go any further, it is important to understand what is a performance bond? Performance bonds are guaranteed by a bonding company that jobs will soon be completed per the specifications of the contract. As the bonding company won’t simply write a check in the event that you default on the job, this is different than insurance. The bonding company may put the job out to bid with select contractors and even finish the work themselves, if the contractor is unable to complete it.
Performance bond requirements are set in place by the Miller Act for several public work contracts. $100,000 Bonds can also be required for private work or by a general contractor demanding it of their sub-contractors.
You are accountable to pay off the bonding company if claims are filed against your performance surety bond. Let’s find out more about how surety bonds work and why having a full comprehension of them can mitigate your own risks.
Just how Much Does a Performance Bond Cost?
The expense of a performance bond is a small portion of the full contract sum. Larger contract premiums are usually around 1%. Smaller contracts have fewer underwriting requirements, but are priced around 3%. Your performance and payment bond price ought to be a part of your bid, so you do not pay for your own bond. Doing this means the owner does.
Performance Bond Rates Explained
The portion of the contract amount you have to pay is also known as your rate, and may differ and change your bonding costs depending on your line of work as well as the state where you perform work. Surety companies file different foundation performance bond rates in each state based on what type of work really needs to be bonded, such as for example, concrete work, architectural building, engineering building and excavation.
Your individual credit will probably be utilized when a surety firm looks at you. When they are determining your rate and considering you for a performance bond, they will look at your finances, however the company financials will be the most significant item that will be reviewed. It can dramatically decrease your rates if you can show financial strength. Give yourself the top opportunity to get the lowest rates possible by understanding what must be provided by using a CPA.
Exactly what is a Payment Bond?
A payment bond is a guarantee that you will pay all sub-contractors suppliers and laborers working on the project.
Do You Need Both?
The guarantee of your performance and payment are so intertwined that payment bonds and a performance bonds are more often than not both demanded. Fortunately, a performance and a payment bond are typically packaged by bonding companies so that you’ll only pay one rate for both. You’ll be able to think of it as paying for the performance bond and getting the payment bond for free. Standalone payment or operation bond requirements do occur at times, however they are a rarity.
Get the Lowest Performance Bond Rates
You’ll need to apply for these bonds beforehand to see if you meet the requirements for bond. When submitting your business financials to the surety firm for a bond request, you have to include a balance sheet, income statement, cash flow statement, disclosures, and work programs.
You’ll desire to ensure your financial statements contain what’s needed to give yourself the top chance of becoming approved when you’re applying for bonding.
Although not required, it’s strongly recommended you have a CPA well versed in building, as they know how to present your business properly to get bonded.