HOW MUCH DO PERFORMANCE BONDS COST?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

Whether it be the construction or real estate development fields, contractors today will likely be required to apply for something known as a performance bond.

While these types of bonds or contracts used to only be utilized in the industrial, commercial, and governmental fields, they are becoming increasingly popular in the residential field as well. This is because they not only give all the parties involved great peace of mind, but they offer protection.

Protection that can offer financial compensation when a contractor or principal becomes insolvent. Unfortunately, you’d be surprised at just how often this happens. And, this is why these bonds are becoming increasingly more and more popular.

All that aside, if you are going to deal with performance bonds, you’ll need to understand everything you possibly can about them. This will not only ensure that you do not get taken advantage of by a contractor, but it will ensure that you get the most pleasing experience possible.

The first step to understanding performance bonds and everything they have to offer is understanding exactly what they are.

TOO LONG; DIDN’T READ (TL;DR)

Ideally, the cost of a performance bond ranges from 1% to 3% of the total contract value. However, there are numerous factors that can either increase or reduce the costs significantly. For instance, number of years in business, bonds being called in the past, and current commercial and financial records.

UNDERSTANDING WHAT PERFORMANCE BONDS ARE?

At the end of the day, one could say that a performance bond is nothing more than a binding contract. A binding contract that ensures the principal meets specific standards and requirements when performing a job. It is the obligee that requires the bond and this can give them the peace of mind that they need to go ahead and hire specific companies. Whether the obligee is new to the industry or hasn’t worked with the contractor before, a performance bond can be issued to ensure that works get performed per professional standards. You can see why these bonds are becoming increasingly popular and more widely utilized.

To learn more about this in detail, please take a look at how does a performance bond work?

UNDERSTANDING ALL THE PARTIES INVOLVED

Whether you are dealing with performance bonds or something similar, you will likely hear terms like principal, obligee, and surety over and over again. You heard them in the above paragraph and they will be used throughout this article. While these parties can be involved in various ways in different bonds, they are always the same entities. For instance, the obligee is always considered the customer. This is the party or the entity that requires the bond in the first place. This is the person or entity getting the work done. This could be the homeowner or governmental agency.

The principal is the company, contractor, or individual doing the work. This will be the construction crew or land developer. This will be the party or the entity that is required by the obligee to apply for the bond. They will be the ones held financially and legally responsible if performance standards are not met. The last party or entity involved with a performance bond is the surety. This is the company that issues the bond to the principal. This entity can either be a bank, an insurance provider, or a specialized bonding company like Stokes Surety Bonds.

While the principal is held legally and financially responsible for performance standards, it will be the surety that faces the initial charges if the contractor becomes insolvent. For instance, if a contractor fails to meet specific standards or become bankrupt, it will be up to the surety to rectify the issue. The surety will then go after the contractor for financial compensation.

ALWAYS WORK WITH QUALIFIED PARTIES

Regardless of the situation, when it comes to performance bonds, it is more than imperative for all parties involved to make sure that they are working with qualified parties. For instance, the obligee or customer will always want to make sure they are working with qualified contractors.

If this is the case, you’d think that the obligee wouldn’t need to request a performance bond in the first place. Well, it is always a good idea to require these types of bonds because it not only gives the obligee peace of mind, but it ensures that specific works will get completed via required standards.

That being said, the principal always wants to make sure they are working with qualified surety or bonding companies. This will not only ensure that they get the right type of bond, but it will ensure that they are protected in the best ways possible.

The best way to make sure that you are working with qualified parties is by doing your research. Whether you are the contractor or the obligee, you will want to take time to research the companies that you are considering. While a performance bond will protect you from getting taken advantage of, it is best to avoid a situation altogether if possible.

FACTORS THAT DETERMINE COSTS

When dealing with performance bonds, you’ll find that each is different. While you might be working with the same obligee, each different project can require different standards and requirements. This is because each job is unique and requires different work. This is why it is imperative to work with qualified companies. That being said, one needs to know and understand that surety and financial institutions have different requirements for performance bonds.



Whatever type of company you are getting a bond from, most will usually look at similar factors when determining the overall cost. This is usually things like:


1. The number of years you’ve been in business

2. Whether or not you’ve had bonds called against you in the past

3. Your current commercial and financial records





It is important to note that the costs can also vary for  contractors with no previous surety bonding history

HOW TO DETERMINE OVERALL COST

Anyone can clearly see that performance bonds are necessary when it comes to construction and real estate development today. All contractors today will likely be required to apply for performance bonds to meet contractual requirements. When you are bidding on work, it can be more than difficult to provide a specific cost that will cover the overall cost of the performance bond. This is why most entities use a rule of thumb. As a general rule of thumb, most contractors expect the cost of a performance bond to be right around 1 percent of the total contract value.

For instance, if the contract totals to $1 million, the contractor can expect to pay a performance bonds premium of anywhere from 1 to 1.5 and 2 percent of that $1 million. That being said, one of the biggest factors that will determine the overall cost of the performance bond is the credit-worthiness of the contractor. If the contractor has bad marks against their personal or financial records, they can expect to pay more for performance bonds.

This is a similar theory applied to insurance. If you have a lot of wrecks on your records, you’ll pay a lot more for coverage. Although performance bonds work around a similar theory to that of insurance, it is important to understand that the two are nowhere near the same thing.

LOWERING YOUR OVERALL COSTS OF PERFORMANCE BONDS

There is no denying that performance bonds are expensive. Even when working with companies like Stokes Surety Bonds that commonly offer sales and discounted rates, you can expect to pay a pretty penny for bonds. This is especially true when first establishing yourself with a bonding company.

It’s like that first initial rent payment, you usually end up having to pay a security deposit along with the first and last month’s rent. Regardless, the cost will be something that you’ll want to lower when and where you can. Unfortunately, there are only several ways that you can go about lowering your overall costs.

One would be by making sure that you don’t get your bond called. Getting a performance bond called is similar to that of having a claim filed against your insurance. The more your bond is called on, the higher costs you can expect to pay. If you keep good financial records and pay all your dues on time, you’ll likely also be able to keep your costs lower. Keeping costs lower is more than important because it means that you’ll be able to charge the customers less.

NEED A CONSTRUCTION SURETY BOND FOR A JOB? COUNT ON STOKES SURETY BONDS