Before a project owner can hire you for a significant construction project, they would draw up a contract containing specific terms. Additionally, they would also require a guarantee that you would efficiently perform the work while adhering to the contractual obligations. A performance bond (which serves as the guarantee) would protect them against financial losses and damages.
You will also require it for public and private sector projects. If you don’t have a bond, they might refuse to hire you. The best way to obtain this document is through a surety broker. But what is a performance bond meaning, why should you have it, how can a surety bond broker help you, and other vital details you should know? Read on to find out.
A short introduction to performance bond:
A performance bond is a document that protects the owner or oblige by ensuring the contractor completes a specific work on time, according to contractual obligations. You might be required to offer bonds for 50% or 100% of the total contract’s value. If the owner has hired you to provide a specific service like tree cutting, snow removal or janitorial services, they might require less than 50% of the overall value.
Benefits of having these bonds:
Even though this bond projects the project owner against financial damages or losses, it is beneficial for you too. Being a bonded contractor gives you a competitive advantage over other contractors in your industry, and it reflects your trustworthiness, professionalism and efficiency in large-scale handling projects. Bonded contractors also have higher chances of attracting more clients and projects because it provides them leverage over non-bonded constructors.
What are the types of performance bonds?
These bonds are of three main types: CCDC, Form 32, and SAC Headstart Subcontractor. CCDC bonds provide the owner with a guarantee of the contractor fulfilling their contractual obligations. Form 32 refers to a document that lays down the main principles of the surety bond, terms and conditions, year of the contract, the balance of contract price, right of action and applicable law.
If a subcontractor defaults on the contractual terms, the general conductor must stop all work until the surety company completes its investigation. They might use the SAC Headstart Subcontractor document to speed up the solution process to prevent time delays.
What happens if you default on a bond?
If you fail to honor the terms and conditions of a construction project’s contract for some reason, it’s called defaulting on a bond. The owner might file for claims under this document to recover their losses if that happens. The surety company might provide you with technical assistance and monetary support in those circumstances. They might hire a new contractor to complete the project and instruct you to repay the amount spent by them.
How much does this document cost?
Usually, a bond costs between 0.5% to 1.5% of the contract’s total value. Companies that issue these documents consider your capital, character, and capacity. If the bond has a timeline warranty, which would be valid for a specific time, it will impact the total cost.
Is it the same as insurance?
Bonds are different from insurance because even though the surety company would provide you financial assistance when the owner files for a claim, you must return the money within a specific time. Unlike insurance which gives you coverage, a bond provides the owner coverage.
Reasons to hire a surety broker
The best way to obtain a performance construction bond is to hire the services of a surety broker or surety solutions company that will assist you with the various processes, help you find a dependable company, and take care of all the necessary documentation. Before issuing the bond, the company would first assess your professionalism, work ethic, and reputation and run reference checks.
You would also have to submit documents like financial statements, contractor’s questionnaire, resume, and bank statements. The process could be pretty complicated, especially if you have just started a new construction company. The surety broker would take care of the process and handle all negotiations efficiently. Since they usually have contacts with various companies, they may also be able to offer you several options.
You must be clear about the performance bond meaning before finding a surety broker. They will help you find the right company, handle negotiations and speed up the process of obtaining the bond.