A performance bond is a surety bond that is written by a bonding company or bank and is issued to secure that a project is satisfactorily completed by a contractor. It insulates the owner in the event the contractor is unable to fulfill the contractual obligations. In the event the obligations are not fulfilled, the surety company will take over and settle the claim. Thereafter, the surety company will recover the money from the contractor.

These bonds are employed towards protecting the owner, the contractor and the individuals who are part of the project (i.e. the general public). Corporate bodies or the government require these bonds on any project in which the investment by the taxpayer must be secured. On government construction projects, one applies for such projects such as bridges and highways. More and more, we are experiencing the need by private owners for the use of performance and payment bonds as well. This keeps the private owner safeguarded from the unfulfilling work by the contractor who might not be able to consummate the work as well as prevents the owner from making a dual payment (i.e. having to pay the subcontractors twice, owing to the GC flaking out and not remitting payment to their subs).

• A payment bond will guarantee that the construction contractor pays all the subcontractors, labor forces, and material suppliers on the project. In case the construction contractor defaults on making the payment, the afore-mentioned parties can raise a claim on the bond.

It is not a price, the cost of a performance and payment bond; rather, it is a premium, or a percentage, a small percentage, that is, of the total value of the contract. Although the bond might be written out for varied values, it is issued more frequently at 100% of the amount of the contract.

Typically, the premiums for respectable contractors will vary between 0.5% and 3% on the total contract value. For high-value contracts, there is the possibility that a sliding scale or "blended" scale will be applied, such that the percentage goes down as the contract value goes up, implying a better price.

Actual cost will be determined by a number of factors, such as:

• Your Credit Worthiness: Your credit score, business credit score, and financial statements work as the biggest determining factors when calculating your rate.
• Company Record: Your history of completing like projects on schedule and under budget will work in your favor when getting a lower premium.
• Project Particulars: Complexity, size, and time-duration of the project all have bearing on the risk perceived as well as the cost incurred on the bond.

In order to get the best possible estimate, we always recommend that you consult with a knowledgeable surety agent who can evaluate your individual credentials and construction needs.

No, the payment and performance bond is not the same as the insurance. Though both are the financial devices employed towards risk management, the latter operates on entirely different principles. The fundamental difference lies in whom they secure and the type of financial assurance.

• What they protect: Insurance is a two-party contract that insures the contracted (the contractor) against one form of loss. For instance, general liability insures a contractor's business against litigation resulted from the bodily injury of third-party. On the other hand, a surety bond is a three-party contract that insures the project owner or other third parties (such as subcontractors) from the default of meeting contractual terms by the contractor. The contractor must acquire the bond, but they are not the one being assured.
• Financial liability: When the insurer pays a claim, they take on the risk. The insurer is not obligated to repay the insurance company (other than the premium and deductible). With a surety bond, if the surety pays on a claim, they hope the contractor will repay the full amount. The bond is essentially like a line of credit or a guarantee, not a risk transfer.
• Underwriting: Insurers estimate risk on the basis of figures and the odds that something will happen (e.g., the odds that a car will have an accident). Surety companies, on the other hand, underwrite the financial soundness, experience, and creditworthiness of a contractor in order that they be totally fit to execute the project and keep their word. They're really doing a pre-qualification with the hope that there will be no claim.