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Performance Bonds
Contract Bonds, commonly referred to as Performance Bonds, are project-specific guarantees between a contractor, the project owner, and a surety company. These construction bonds provide reassurance that should a contractor fail to perform their contractual obligations, the surety company will make a payout to the project owner to complete any neglected commitment.
Jet knows that in construction, things are often time-sensitive, which is why we have created a streamlined surety bond process to get you approved and bonded quickly.
How Much Does a Performance Bond Cost With Jet?
The contractor’s financial standing and the project cost are the main determinants of the bond premium, although there are several other factors involved in calculating an appropriate bond rate for each situation—more on that below. With Jet, there are two pricing structures contractors can fall under:
Quick Program Bonds
Jet’s Quick Program helps small to medium-sized contractor businesses. Contractors are typically approved online in minutes for a performance bond. In this Program, a flat percentage is applied to the project amount to calculate the bond premium, as follows:
| Bond Risk Category | % of Project Amount |
|---|---|
| Ultra-Low Rate | 2% |
| Average Rate | 3% |
Example for a $400,000 Contract Bond costs $8,000 once approved.
Account Program Bonds
Jet’s Account Program is geared toward contractors frequently bidding on bonded projects. Full underwriting is required, which includes a review of past project success, business financial statements, personal financial statements for each of the owners, bank references, and a work-in-progress schedule.
| Risk Category | First $100,000 | Next $400,000 | Over $500,000 |
|---|---|---|---|
| Ultra-Low Rate | 1.5% | 1% | 0.5% |
| Average Rate | 2.5% | 2% | 1.5% |
Example cost for a $5,000,000 Contract Bond: $1,500 + $4,000 + $22,500 = $28,000
Parties Involved in a Contract Bond Guarantee
Contractor (Principal) - the one performing the work on the project—must get a Performance Bond to guarantee the completion of work according to the contract.
Obligee - the project owner, aka the person or entity hiring the contractor to provide services on a large-scale building. Obligees are generally government agencies (cities and counties), general contractors, and property/business owners.
Surety Company - the entity providing the surety bond that promises payment should a bonded contractor default on the contract.
When Is a Performance Bond Required?
Federal, state, and local governments require a contract bond depending on the project size. Per The Miller Act, any construction project awarded by the federal government and valued at $100,000 or greater requires a Performance Bond and a Payment Bond. Many states have adopted similar requirements. Businesses in the private sector may also make contract bonds mandatory to ensure their protection from financial losses due to the contractor’s failure or refusal to complete the projects per the contract.
Without a surety bond in place, there is only essentially the word of the contractor that the project will be completed per the agreed-upon contract. Sure, the hired contractor that failed to do the job as specified could make amends or fix outstanding problems but could (with no effort) do nothing and stick it to the project owner.
This, of course, is not good for reputation and there will be court summons in short order, but restitution is still not a guarantee for the project owner’s damage. If there was only a way to involve a third-party financier—enter Jet Insurance Company as the surety to back the contractor and provide the financial guarantee that project owners demand.
How to Get a Contract Bond
Unlike other surety bonds, the contract bond process is a bit more arduous—keep in mind that Jet has simplified this process to get you in and out as quickly as possible.
First, a Bid Bond must be obtained in most cases. This is at no cost to the contractor, but it allows the hiring entity to see that a surety company will back the contractor with a Performance Bond should they be awarded the contract. Our application accounts for this. Click below to get a bid bond started, should take only a couple of minutes:
Once you’ve been approved for a rate, it will be delivered to you via email where you can click the link and purchase the Performance Bond directly online. The digital bond form and your receipt will be available to download after successful payment.
If you have any questions or updates regarding the bond status, you can reach us by email at bonddept@jetsurety.com or by phone at (855) 296-2663.
Your Bond Is Active, Now What?
The bond, once active, must remain in full force until the project is completed according to the obligee’s terms. A project that runs longer than specified in the contract is at risk for a bond claim, so it’s important to follow the contract timeline.
Upon wrapping up the project, the obligee issues a General Status Inquiry, which is a notice of completion for the contractor to provide to the surety company. This notice allows the surety company to release the project amount back into the total available bond limit.
Finally, a Maintenance Bond may be required at the end of the project which puts liability on the contractor to fix any issues for a specified time after the project is completed. Generally, these coverages are included in the original contract.
Performance Bond Claims
Bond claims happen when a contractor fails to perform work according to the contract terms—some examples of this include the contractor abandoning the project, causing delays (liquidated damages), and non-payment to suppliers or subcontractors. The obligee, subcontractor, or supplier has unsuccessfully been able to receive compliance or recompense from the contractor and is now turning to the surety company for restitution.
Once the surety company (Jet) is notified of the claim, an investigation begins to dig into the details surrounding the allegations. The contractor and obligee will be asked to provide any related correspondence and documentation.
Jet encourages contractors and obligees to avoid claim situations by working together on a solution to prevent delayed/unfinished projects and costly payouts. Contractors with a negative claim history are less likely to qualify for future projects.
Also, a paid-out claim does not absolve a contractor from responsibility for the damages caused. Unlike insurance, with surety bonds, the contractor indemnifies the surety company against any loss (this is the case with all surety companies). Meaning if the surety company makes a claim payment, they will still collect those losses from the contractor. Surety bonds are not intended to cover accidents, but intentional or negligent behavior on the part of the insured (bonded in this case).
Types of Construction Bonds Related to Performance Bonds
Aside from the common Performance Bond (Contract Bond) used to guarantee the project duties are completed according to the contract terms, there are several bond types contractors may need prior to working on any project.
Contractor License Bond - some states require a Contractor Bond to be on file for the entire duration the contractor is licensed and operating. For example, the California Contractors State License Board (CSLB) requires a $25,000 surety bond for all contractors. California has several other bond requirements for contractors, depending on the contractor’s classification and other factors.
Bid Bond - To even get to the point of needing a Performance Bond, a Bid Bond is often required. The Bid Bond is of no cost to the contractor—it shows that should they be awarded the contract, they have a surety company willing to write their Performance Bond and therefore enter into a contract with the obligee.
Payment Bond - A Payment Bond is often required alongside a Performance Bond. While the Performance Bond is used to ensure all work is completed according to the contract, the Payment Bond helps reassure the obligee that all materials and labor will be paid.
Subdivision/Site Improvement Bond - Similar to a Performance Bond, a Subdivision Bond ensures public works improvements will be made by the developer according to the law. The obligee is typically a city or county government. Landowners/developers secure these bonds in situations where improvements involve sidewalks/rights-of-way, streets, sewers, electrical lines, etc.
Maintenance Bond - A separate bond is sometimes required on public projects that provides coverage for defects and faults for a specified amount of time after project completion. Typically, these coverages are included as part of the original contract.
Supply Bond - Supply Bonds are used to guarantee the delivery of materials from the supplier. Contractors should not typically be asked to provide this bond since it relates directly to the supplier.