Performance Bond
A surety bond that guarantees the contractor will complete the contracted work according to the terms of the contract.
Definition
A performance bond is a surety bond that guarantees the contractor will complete the contracted work according to the terms of the contract. If the contractor defaults, the surety steps in either by financing completion through the original contractor, hiring a replacement contractor, or paying damages up to the bond face value (typically 100 percent of the contract amount).
Performance bonds are paired with payment bonds (which guarantee that subcontractors and suppliers will be paid). Together they are mandatory on federal projects under the Miller Act and on most state and municipal projects under Little Miller Acts.
How performance bond is used in estimating
For estimators, the cost of the performance bond is a direct line item in the bid. Bond rates vary by contractor financial strength and project size, typically running 0.5 to 3 percent of the contract amount on a single bond, with payment and performance bonds bundled together. A first-time bonded contractor will pay more than an established bonded firm with a long claim-free track record.
Bonding capacity is a hard ceiling on the size of project a contractor can pursue. Sureties evaluate working capital, net worth, banking relationships, and past performance to set both single-job and aggregate bonding limits. Estimators on growing firms work closely with their bonding agent to understand how a target project fits within the firm’s available bonding capacity before committing time to the bid.
When performance bonds are required
Performance and payment bonds are mandatory on federal construction projects above defined thresholds (Miller Act), on most state and local public projects (Little Miller Acts), and on many private projects above a certain contract value. Owners on private work increasingly require bonds on subcontracts as well as on the prime contract. Confirm bond requirements early — bonding capacity issues can disqualify a contractor before a single takeoff line is measured.
Frequently asked questions
Q.How much does a performance bond cost?
Bond premium typically runs 0.5 to 3 percent of the contract amount. The exact rate depends on the contractor’s bonding history, financials, and the project size and risk.
Q.What is the difference between a performance bond and a payment bond?
A performance bond protects the owner from contractor default on the work. A payment bond protects subcontractors and suppliers from nonpayment by the contractor. They are usually issued together at no extra premium.
Q.When does a performance bond expire?
Most performance bonds remain in force until completion of the project, with a tail period (often one year) covering warranty obligations. Specific terms are stated in the bond form.
Q.Can a contractor work without a performance bond?
On private work, often yes. On federal and most state and municipal work, no — bonds are mandatory above defined thresholds. Always check the contract documents before assuming a bond is or is not required.
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