A performance bond ensures a contractor completes the project within the timeframe. So, how does performance bond work? It is legally binding that an insurance company generally issues, or a bank, which acts as a surety and assures the project manager that the project will be completed by strictly adhering to the terms and guidelines mentioned in the contract.

As per the Miller Act, contractors must have these bonds before starting any work. Also, performance and payment bonds go hand in hand. While one ensures the timely and proper completion of the project, the other one ensures the timely payment of the contractor upon the successful completion of the project.

how does performance bond work

This article talks about everything you must know about performance bonds.

How Do These Work?

The private and government sector require payment bonds and performance bonds for projects to protect the investment of the taxpayer. Payments and performance bonds for government projects include building roads and bridges; however, they are also broadly used across other construction sectors.

The surety bonding company will have to either pay for completing the project or hire a contracting firm to finish the project. In a nutshell, it will help the owner stay protected against probable losses if the contractor cannot give the project according to the contractor declaring or defaulting on bankruptcy.

In these cases, the surety is the one who has to compensate for the losses of the owner. This is the answer to the question, “how does a performance bond work?”.

Its payment is available to those property or project owners, and no others can make claims against it. To make this surety more effective, it is essential that the contract should specify the work that is to be completed; otherwise, the contractor can’t be held accountable.

Document Needed for Issuing

Financial and surety institutions have various requirements that depend on the contractor’s capacity, how complicated the project is, and the volume of the project. Generally, these are the documents that insurance companies ask for:

  • Application of surety
  • Copy of the contract that is awarded
  • CPA prepared a financial statement of at least two years

Miller Act states that these accords are a must-have document, and the contractors must prepare this document before signing the contract.

The cost of the accord varies and depends on numerous factors like the contractor’s creditworthiness, how big the project is, how much time it will be needed to finish this project etc. A contractor can expect the accords’ cost to be around one percent of the value of the contract.

Benefits of Issuing These Accords

Performance bonds have numerous advantages. They make sure the following:

  • The owner doesn’t have to bear the additional costs.
  • The project’s owner is assured of project completion.
  • They ensure the timely completion of work.
  • They ensure that the work is done precisely as per the guidelines.

Performance bonds play an essential role in almost all industries, specifically construction. Generally, both performance and payment accords are prepared together and hold a similar value. The bank or the insurance companies issue them. In most cases, the contractors must provide these certificates before they are allocated any work.

In the long run, these increase the contractor’s credibility and thus help them acquire high-paying contracts. According to these accords, the contractors will be held responsible if they fail to complete the work on time or adhere to the guidelines.


Please enter your comment!
Please enter your name here