Who needs a performance bond?
Performance bonds are rare in the engineering and construction industry, but there are cases where they should be used for projects that have a long lifespan.
In general, performance bonds are not required by design-build contracts or federal projects unless otherwise specified. In other words, many believe that as long as the specification doesn’t call for one that it’s as good as “not sure.” However, this isn’t always true. We should know how to use these insurance policies when necessary. Otherwise, we could be leaving ourselves open to potential future disasters down the line.
What does a performance bond guarantee?
A performance bond or performance guarantee is a type of surety bond.
A performance bond guarantees that a company will be able to complete a certain project as specified in the contract if the client chooses to use this option.
In other words, the contractor must abide by all terms and conditions set out in the contract.
The client can also add specific conditions which need to be met before they release payment from the advance account. The client has control over what should occur when payments are made while ensuring quality workmanship and materials are used during construction. For example, water tightness testing may be one ensures procedures under a performance guarantee clause for a construction company building a dam or levee system. any sort of guarantee, there’s always a list of requirements that the job seeker must meet.
The contractor is responsible for all damages that result from flawed or defective workmanship/materials, as well as accidents related to the construction project. Anyone who has hired someone to perform a service for them knows that if something goes wrong, it can be difficult to hold the other party accountable. In addition, if an accident occurs during the project, who will assume responsibility?
You should always ask for proof in writing – you don’t want to find yourself left high and dry by someone who promised more than he could deliver. Not all contractors have been vetted by licensing authorities so hiring an unlicensed individual may leave you open to problems down the road.
What are the consequences of not providing a performance bond?
Not providing a performance bond subjects the contractor to liability for any damages resulting from the subcontractor’s injury or death that occur during contract work. For example, say that Subcontractor A was injured while working on project X and sues Contractor B, who was responsible for providing a performance bond.
If it is determined that an adequate performance bond was never established by Contractor B, then Contractor B would be responsible for paying all costs incurred as a result of Subcontractor A’s injuries including legal fees and medical expenses.
Additionally, if Subcontractor A’s injuries were severe enough to end his career as a carpenter causing him to no longer earn wages, then Contractor B would be responsible for paying Subcontractor A until he is able to earn the same wages that he was once earning before his on-site injury occurred.
Who should have a performance bond?
The list is long, but it includes construction companies, architects, engineers, general contractors, subcontractors, and suppliers.
Performance bonds are written by surety companies as an assurance of work or materials for a project on which they are obligated to pay claims as required under the terms of the bond agreement.
Performance bonds usually cost from 0.75 percent to 2 percent of the bond’s face value annually and typically cover only those who ask for them. In other words, if a company asks for a performance bond and has a claim against you as a result of nonperformance by your company on the contract generally you must pay upon your performance bond before paying any part of the claim.
On large projects, there is often more than one principal contractor and several subcontractors involved in the performance of the contract. The owner may require a bond from each prime contractor as a condition to enter into a prime contract with that contractor. The prime contractor will then typically require a similar bond from each subcontractor prior to awarding them an order for services or materials.
Not all owners have this requirement, but it does allow for greater control over the project by the owner’s representative which can be useful during construction. In many cases, Owner’s Representatives use their own bonding company so they don’t have to deal with soliciting bonds throughout a project instead of paying bills and managing progress on site.
Although not common, it is entirely possible for a subcontractor to offer their own performance bond in lieu of having one required by the Owner’s Representative. This must be discussed and agreed upon prior to soliciting any performance bonds for a project, but can result in significant savings if done correctly and does not delay the labor and materials needed onsite.
Are performance bonds required on all proposals?
No, bonds are not required on all proposals. The determination of whether a bond is required is based on the dollar value of the contract. For contracts with a dollar value that is less than or equal to $100,000, there are no requirements pertaining to performance bonds.
For contracts above $100,000 up to and including $500,000, the prime contractor must provide evidence of either an individual surety bond for 100 percent of the contract price or a bid bond issued by financial institutions qualified as acceptable sureties in accordance with CFR 49 part 9.
The Bidder shall furnish performance security in an amount equal to at least 100 percent of the amount called for in this provision % sample format % clause 252.232-7003(j) Revised February 15, 2012.
The Bidder shall furnish performance security in an amount equal to at least 100 percent of the amount called for in this provision % sample format % clause 252.232-7003(k) Revised February 15, 2012.