Performance Bonds 101: A Guide For Curious Contractor Clients

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When you are hiring a contractor to complete a project on your property, you need some kind of reassurance that the contractor's job will leave you happy with the work they have provided. Performance bonds are a little like a form of reassurance when you are hiring a contractor you may know nothing about. While most property owners and clients know that getting a contractor who is bonded is important, most don't understand what a performance bond actually is. Here are a few of the more common questions about performance bond construction contractors and the answers you should know. 

What exactly is a performance bond for a construction contractor?

In order to ensure a client is satisfied with the end result of a project, a performance bond is provided by either an insurance company or other entity. This bond picks up the tab if the customer finds the work to be unsatisfactory and they have to hire someone else to do the work or to finish the job. If you have ever met a contractor who advertised they were "insured" and "bonded", it means they carry a bond to ensure their customers are satisfied. 

How do contractors obtain performance bonds?

In order to obtain a performance bond, a contractor has to show proof that they are licensed in what they do and are capable of completing satisfactory projects with customers. The contractor pays for the bond provision, which has a price that is usually a percentage of the total costs of the price of the project. For example, a contractor may be doing a job that costs $1 million, but they would pay one or two percent to obtain a performance bond to cover that amount. In the event the contractor does not fulfill their end of the contract or the client is unsatisfied, the bond will cover the costs. 

What is the difference between a performance bond and a payment bond?

A performance bond is to assure you are satisfied with the overall performance of the contractor. On the other hand, a payment bond is often included as part of a performance bond package deal of sorts but covers a different area of the agreed-upon contract. If a contractor has a payment bond, it means that the people working under them or supplying them will be paid once the project is completed. As a way of avoiding up-front material and labor costs, a contractor often gets a payment bond that shows all bills will be paid upon completion or payment by the client.