Understanding Performance Bonds

Written By Charlotte Insurance on March 7, 2024. It has 0 comments.

a contractor and homeowner discussing the need for performance bonds

General contractors, regardless of their specialty, need to understand how performance bonds work. Many states require these bonds, which provide an additional layer of protection for the people who hire the contractor to get their ordered work done. Without one, you have no recourse should the contractor disappear before the job is complete. These specialty bonds provide an extra layer of security between the homeowner and the contracting company. Here’s what you need to know about performance bonds.

What is a Performance Bond?

Starting at the very beginning, a performance bond is a type of surety bond. Each of these bonds has a special purpose, such as bid bonds that provide contractors with a backup plan should a job contract not get signed despite getting the winning bid. As expected, a performance bond is a method of ensuring that the contractor performs the job properly, getting it done within budget and in a manner that the homeowner approves.

How Do Performance Bonds Work?

The process of obtaining a performance bond is the same every time:

  1. A contractor and a homeowner enter into an agreement via contract. This contract explains the scope of the job (also known as what the homeowners wants done) and the overall budget and timeline.
  2. The contractor then reaches out to a surety bond company and applies for a performance bond. They pay a certain agreed-upon amount for the bond. The bond company now has an obligation to ensure that the work gets done. This makes the homeowner happy.
  3. If the job mentioned gets done on time and in a satisfactory manner, then the bond is dissolved. The contractor gets their money back and can use it to enter into a new bond for the next job.
  4. However, if things go wrong, the bond holder, also known as the surety company, has to find a new contractor to get the job done. The current contractor loses out and usually ends up with their reputation tarnished.

How Much Do Performance Bonds Cost?

There are two numbers to note when discussing performance bonds. The first is the overall amount that the bond is worth. This is determined by the scope of the job and any state or city requirements. Usually, a bond is required by the state in order for the contractor to legally work and take on jobs, so the government has a say in the amount of the bond.

The second number is how much the contractor will pay for the bond. This amount depends on a number of factors, including the contractor’s work completion history, the company’s credit score, any terminated bonds, and a number of other things. In most cases, the contractor pays between one and three percent of the total bond amount, but this can vary.

Have Questions? Contact Charlotte Insurance

Want to learn more about performance bonds for contractors? Contact Charlotte Insurance. Our agents can explore and explain all available options and put together the insurance coverage plan your business needs.

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