Who needs a performance bond?
The Performance Bond is a contract between a contractor, subcontractor, and a public owner. The bond protects the public owner by guaranteeing the performance of the contractor and subcontractors as agreed to in their prime contract or agreement with that particular company.
It also acts as additional security for those who may have been affected by the failure of the prime contractor to perform as expected, such as employees, suppliers, and vendors, etc. In short, it makes sure your project will be completed on time and within budget as designed – saving you money – time – stress – you get all three!
After the prime contractor has been selected, the public owner (owner) will require that a performance bond be submitted by each of the prime contractor’s subcontractors. This guarantee ensures that the subcontractor’s work on the project will be completed, or an agreed amount will be reimbursed to the public owner.
The Performance Bond is very common in large-scale construction projects where there are many subcontractors involved.
Performance Bonds are required for every type of contract, with each state having its own requirements as well as local agencies. There are three types of performance bonds available now: Bid Bond, Contract Bond, and Sub-Contract Bond. The Bid bond is used at the pre-construction phase to guarantee the bid price – if you are not awarded the contract a refund will be given.
How do you collect on a performance bond?
The party that receives the Performance Bond is usually an insurer. They will receive a fee for providing the bond together with all of the administration costs for processing any claims, including attorney fees and litigation costs.
The public Owner/Owner is responsible to ensure that performance bonds are in place per contract. If there are delays or nonperformance issues within the contract, these must be addressed by having a clear set of remedies outlined in the contract documents to enable them to fix situations.
The most common remedy is time extension but it can also include monetary penalties if it is stated in the contract itself (keeping in mind other remedies such as extensions of time should not be used without careful consideration). The other important task public owner/owner has is to make sure subcontractor has a performance bond. Some contractors may make a subcontractor not put a Performance Bond if they themselves have a Contract Performance Bond with the owner, which is acceptable in some cases.
The insurance company will receive all documentation of nonperformance and delay from contractors or subcontractors and review these to determine whether there is any loss, such as delay damages or cost increases, that is covered by the bond.
Once this is determined the insurance company will then pay for any losses suffered by the public owner/owner up to the limit of coverage in the bond per each performance guarantee insured. Since every case cannot be foreseen, most bonds cover up to $15 million so even several claims can be covered without reaching the overall coverage amount in one claim.
Are performance bonds taxable?
For any person or business, the premiums received for providing a performance bond are considered to be ordinary income and taxed at their normal federal tax rate, according to Section 61 of the IRS code. Once again it is important to consult with your CPA regarding the effect of taxes on your particular situation.
Performance bonds act as an incentive towards completing each project within schedule and budget constraints since they protect owners from potential costs due to the contractor’s failure to do so.
These guarantees also play an important role in protecting subcontractors’ interests, thus allowing them to secure additional public contracts without compromising their financial stability. As this market continues its rapid development, more innovative concepts will surely arise that will contribute even further towards better safety at home and abroad.
When can you release a performance bond?
The Release of a Performance Bond can be done when all work is completed satisfactorily or if the public owner/owner releases the bond. If there are damages, then it will depend on what was agreed upon in the contract regarding claims and protests.
When do you stop making payments to subcontractors?
Payments to Subcontractors generally stop when the Public Owner/Owner has accepted final payment from the contractor, or after all performance guarantees have expired without a claim being made within the time period provided for each specific type of bond.
It is important to note that these periods can vary depending on whether a Sub-Performance Bond is required as part of the original contract agreement. At a minimum, a Sub-Contract Performance Bond should be used which covers for work of the subcontractor and notifies the owner of the completion along with potential penalties if work is incomplete.
Do you need a contract performance bond for every type of project?
It depends on what your business or industry requires and also the specifics of each project that you aim to undertake. Some industries like government, healthcare, real estate have minimum requirements in place for contractors to have performance bonds in place so they can bid on public contracts.
This ensures there will be no delays since typically these projects are hold-harmless agreements with taxpayers’ money involved which has to be accounted for properly. In contrast, many private sector companies do not require their contractors to have performance bonds but it would be beneficial if one is available in case of any disputes or claims arising from a project.
Where can I obtain a performance bond?
There are many insurance companies that provide performance bonds as a public service, but you should always check with your attorney first before obtaining one to ensure that you will qualify for such coverage.
In addition, the bond must meet the requirements as set forth by your state and local regulations as well as those of other stakeholders whose interests may be affected by a project. Also, make sure to ask about rates and whether any discounts apply if you also have other types of insurance with this or another company because there could be significant savings on a number of policies over a period of time.