What Are Performance Bonds?
Performance bonds are a legal agreement in which the surety guarantees that a contractor or principal will perform the obligations according to the established plans and specifications of the contract. Performance bonds provide security to the obligee that, should the contractor fail to perform their obligation under the contract, the surety will assume the responsibilities of the contract as per the terms of the contract and subject to the conditions on the bond. The surety may:
- Complete the contract involving the original contractor by providing any required financial, management or technical support.
- Re-tender to a new low bid and pay for the cost of completion in excess of the contract price.
- Pay the bond penalty.
When a contractor is the successful bidder on a tender, a construction bond is often required to be submitted along with various documents prior to starting work. Performance bonds are most often requested on public projects but can be requested by private owners as well. Performance bonds are available for general contractors, sub-contractors along with many niche industries including suppliers, manufactures and engineering companies.
Qualifying For Performance Bonds?
To determine whether or not a contractor qualifies for performance bonds, the surety will look to the 3 “C´s” of credit.
- Character: Does the contractor have a good track record, good references and integrity?
- Capacity: Does the contractor have sufficient cash flow to service the job and to weather potential delays in payment? Is a line of credit in place, in case of emergency?
- Capital: Does the contractor have a strong net worth position?
Ai Surety Bonding has programs available for performance bonds of all sizes. Whether you are a large experienced contractor or an emerging contractor, we can secure the bonding facility that is right for you.
Construction Bonds for Emerging Contractors
Are you an emerging contractor looking for your first performance bond facility? Have you experienced issues qualifying for a traditional surety or have been deterred due to the high complexity or the vast amount of required paperwork?
Ai Surety Bonding offers solutions for emerging contractors, for projects up to a limit of $300,000. The emerging contractors' program offers a quick and easy qualification process and provides needed flexibility to graduate into a standard facility, issuing performance bonds in excess of $300,000.
The program's performance bonds are underwritten by a Canadian licensed and provincially approved insurer, on industry standard CCDC forms, and facilitate bids bonds, 50% or 100% performance bonds, 50% or 100% labour & material bonds, maintenance bonds, consents of surety, agreements to bond and all other standard and non-standard requirements.
In the construction industry, there are various types of Contract Bonds, each supporting a different aspect or stage of a particular project. Various bonds have been designed to satisfy the needs of a project from the initial tendering phase right through to the completion stage. Bid Bonds, for instance, are used at the bidding stage, where the tendering process takes place, while Performance Bonds are used when the building phase of a project has commenced. Essentially, a Bond is a guarantee from a contractor or supplier (issued by a surety firm) that legitimately supports the obligations of a contract. For the most past, the primary parties involved in a Bond are the contractor who will expedite the work; the project owner who is offering up the contract; and the guarantor who issues the bond.
Performance Bonds offer a guarantee that project work will be performed according to the defined terms and conditions of the contract. Performance Bonds provide monetary compensation to the project owner in the event that a contractor defaults in some manner, and causes the project to suffer a loss. Contractor default may ensue for a variety of reasons, including project mismanagement, lack of financial capital, even contractor insolvency. In most cases, a recognized Surety Company issues the Performance Bond on the request of a contractor (known as the principal), and when a new job contract is being signed with a project owner (known as the obligee).
The Performance Bond serves as a guarantee to the obligee that the job will be completed by the contractor, according to the terms and conditions as defined in the contract. The bond further provides security in the event that the principal fails to fulfill the obligations of the contract – in which case the Surety Company will underwrite the required financial compensation.
Maintenance Bonds are a specific form of Contract Bond, which relate to the maintenance period of a project, and are sometimes requested by a project owner. These are designed to provide recompense, in case there are instances of substandard workmanship, or defective materials, either of which have been discovered when the project has been completed. Maintenance Bonds provide security to the project owner, ensuring that the contractor will provide maintenance and repair, where required, according to the contract terms, and for a specified period of time after project completion. The Maintenance Bond will usually cover a period of 1 year, and is specific to the contractor’s workmanship, and not for long-term warrantees.
In some exceptional situations, Lien Bonds are issued, in order to provide additional security in a court of law – it means that the contractor will honour third party claims from suppliers and sub-trades for money owed, for work completed. The actual document registers property as collateral against the loan – it will attempt to ensure that debts are paid, and if not, the property will be seized as payment. The individual offering the property as collateral is the lienor - the individual collecting payment in the form of the property is the lienee.
Bid Bonds are issued during the bidding process and provide a guarantee to the project owner that a contractor’s winning bid will meet the terms of a tendered contract. Within the framework of a bid, the contractor (also referred to as the principal) registers a bid, and purchases the bid bond. The bid bond serves to pre-qualify the principal, and provides a security guarantee to the project owner, assuring that the principal will fulfill the contract obligations. As one of many kinds of Bonds, Bid Bonds are intended to protect the various interests of stakeholders participating in a particular project. For a contractor, the Bid Bond denotes a serious offer, and a valid prequalification for the project. For the project owner, the Bid Bond brings a security guarantee that the contractor is committed to the job, and able to complete the contract.
Surety Companies are similar to the traditional lenders, and subscribe to the same fundamental guidelines when assessing risk and evaluating a company’s worth and value. They evaluate credit worthiness based on the 3 C’s of Credit: character - capacity - capital. And when it comes to Bonds, the same formula applies in determining whether or not a contractor qualifies for a bond. For company character: does the applicant contractor have a reputable working history, with a trustworthy track record, and good business references? For capacity to undertake the project: does the applicant contractor have appropriate cash flow to complete the job and to withstand consequent payment delays? Is there a line-of-credit, in the event of unforeseen problems? For working capital: does the applicant contractor have a durable net worth, with equity requirement that meets the need of the project?
For project owners, general contractors and associated stakeholders, Bonds are critical in endorsing the efficacy of a contractor, and by extension, suppliers and sub-trades. They affirm a contractor’s capability and capacity to undertake a project; they corroborate the contractor’s short and long-term financial strength; and they demonstrate support and backup from a recognized Surety Company. In short, they provide a vote of confidence for all stakeholders, while creating a positive and productive working environment throughout the entire lifespan of the project. And, in worst-case scenarios, there are mechanisms in place to reduce harm and avoid financial catastrophe.
An experienced and established Surety Company can also set the stage for a contractor’s future needs, where Bonds can be eventually issued without delay. Contractors planning for upcoming projects can quite easily supply financial paperwork, business outlines, and bonding requirements, even before a project is in the works. This allows for much of the legwork to be expedited, and for a contractor to establish relations in a timely manner. In fact, all of the financial reviews and legal work can be implemented and ready to go, even before the first project is in sight. Not to mention that a good Surety Company will provide the kind of advice and counsel to allow a contractor to make determined, well-informed decisions when large budgets are concerned. A knowledgeable firm will also help their clients to better understand risk, negotiate superior contract terms and conditions, and strive for more competitive rates. Most importantly, a reputable Surety Company will represent their clients with integrity, in a business environment that encompasses competing interests, trade-offs, and sometimes conflict.
Applying For Performance Bonds? Have Questions?
Contact our surety experts at 1-877-213-4545 or email@example.com