Who needs a performance bond?
Some contractors refer to themselves as “performance bonded” this does not mean that the surety company has rated them at the higher financial levels required by today’s more complex projects. Instead, it means only that they have asked for and received surety bonding on their first project (a lower level of financial responsibility) and have satisfied the requirements of that bond.
The surety company expects that they will perform satisfactorily on that project, but has made no prediction regarding their ability to provide satisfactory performance on larger or more complex projects in the future.
Since many contractors are small businesses with thin profit margins, one might think that providing for bonding is costly, putting them at a disadvantage when competing for your business. While this may be true in some cases, in most cases it’s misleading.
What does a performance bond guarantee?
A performance bond is a type of financial guarantee. In most cases, it guarantees that a specified party will meet their contractual obligations with another company or individual. It also protects the contracting party from default by ensuring they have been paid upfront.
Performance bonds can be either partial or full, depending on the requirements of the contract in question. The premium paid for a performance bond depends on many factors, such as risk, value, and labor involved. At times, a performance bond may not be required by law but it is instead considered prudent business practice by both parties to ensure quality workmanship is provided and payment received before any services begin.
What are the consequences of not providing a performance bond?
Most Performance Bonds will only pay out if certain events occur, such as non-payment or breach of contract, rather than just because the company goes into liquidation. Some companies offer guarantor services where you can provide financial assistance to an individual or company who has difficulty in obtaining a bond for themselves.
The consequences of not providing a performance bond are that the borrower may miss out on business opportunities, which can lead to reduced revenue and/or profits. If you are unable to provide event-specific guarantees then you risk losing customers due to their reluctance to do business with your company.
You could end up purchasing the Performance Bond yourself if your customer demands it as part of doing business together. Guarantorserviceshelp.co.uk offers services that can help both lenders and borrowers find appropriate bonding companies so they can avoid having this issue again in the future.
Who should have a performance bond?
A performance bond is designed to make sure that the contractor does what he/she promised. They are obtained by clients who want to be sure they will receive all the services contracted for.
A performance bond could be required for various reasons, including:
- The amount of money involved in a project or contract makes it necessary, e.g.: A large construction project involving many subcontractors and suppliers would require a substantial performance bond since if anyone sub-contractor failed to perform then the entire project might fail.
- An important policy or process objective is quality, safety, or regulatory compliance. Failure of an outside supplier or service provider could threaten the achievement of this policy or process objective.
- A failure of an outside supplier or service provider could threaten the life, health, or safety of people, damage property or the environment (e.g., food handling).
- The organization is in a regulated industry and needs to submit reports that provide third-party verification of performance to regulatory agencies (e.g., financial reporting for publicly traded companies). Performance bonds are also required under certain circumstances by most federal funding agencies when contractors are working on Federally-funded projects.
Since many organizations find it difficult to find suitable bonding capacity within their immediate network, they look outside their own organization for additional capacity through an agent who has access to a large pool of potential bond capacity but charges the client for this service with a fee.
Are performance bonds required on all proposals?
A performance bond is a guarantee that a contractor will complete his work according to the terms of the contract. The bond provides protection to the government should your company default or decide not to fulfill its obligations outlined in your proposal or contract with them.
When a performance bond is on fixed-price construction contracts, an alternative to using a performance bond can be using an alternative payment method that will not require bonding, such as drawdown payments.
Drawdown payments are advanced payments based on milestones reached within your contract with them that you are then able to use to offset costs because you have already completed certain portions of work outlined in your proposal or contract.
They will offer to draw down payments at a percentage of the remaining costs to be completed. This can work as an alternative to a performance bond if contracting with the government on fixed-price construction contracts under the simplified acquisition threshold.