What makes a performance bond so crucial for contractors?

If you recently landed upon a construction project, you must be happy and ready to begin work. However, you might face a hurdle if the owner refuses to work with you unless you have a document called performance bonds. 

Since a project is a significant investment, several owners refrain from hiring contractors without this document. The bond is a financial guarantee and protects them from unexpected monetary losses when the contractors cannot complete their obligations.

Without this contract, they might refuse to hire you or recommend your services to others. Therefore, you should consider getting this document to land more projects and take advantage. 

Which industries usually require it?

Construction companies or contractors like electrical, sewer, mechanical, heavy civil, and road paving require bonds before starting a project. Service-based contractors like tree cutting, snow removal, landscaping, and janitorial also need this document. 

Why are performance bonds necessary?

The foremost reason is that no business person would be willing to hire you without a guarantee. And the bond guarantees that you will meet the contractual obligations according to the terms and conditions listed.

A project involves a significant investment of time and money. So the owners who invest their money need to feel secure. 

Which parties are involved in this arrangement?

It typically involves three parties:

1. You (as the contractor/principal)
2. Surety (a company that provides the guarantee)
3. A project owner (obligee)

The surety financially compensates the owner if the contractor backs out or leaves a project incomplete.

What are the limits set for them?

Most owners require bonds for 50% of 100% of the contract’s value. However, service-based contracts usually have less than 50% of the construction value, but this doesn’t happen very often.

This document is mandatory for all publicly-funded construction projects over 500,000 CAD. Private companies have also incorporated this requirement in their tender specifications because of its numerous advantages.  

Is it different from insurance?

Some people incorrectly confuse insurance and bonds with being the same thing. However, there is a difference. Insurance provides coverage or compensation for losses incurred for various reasons, and the insurer protects you financially.

But bonds provide coverage to the obligee or project owners. If you fail to abide by a contract’s obligations, they will file a claim against you. Although your surety company will compensate them, you will have to repay the money later.

What happens if you don’t pay the surety?

The surety acts as your guarantee, compensating the owner if they file for damages. But if you fail to repay the surety, they might take legal action against you for not paying the money owed to them. In addition, it would impact your future chances of getting this certificate and landing other projects. 

Why should you hire a broker?

You can get the bond from a surety or bond company, which will issue it after considering certain factors. The best option is to find a surety broker who will make the process quicker, convenient, and hassle-free for you. 

They will act as the primary communicator between you and the company, helping you find the relevant document and information for the application process. You can count on them to keep your file updated and inform you of any changes.

Before choosing a broker, you should see whether they have the experience. A skilled broker has associations with several surety companies and helps you find one according to your requirements. 

What are the documents required?

Most companies will ask you for the financial statements, contractor’s questionnaire, personal net worth statement, professional resume, and a copy of Banking Terms and Conditions. 

Besides the documents, the surety would also consider your professional character before issuing the bond. Past reputation, reference checks, and years of experience are some things they will consider.

They might also check a contractor’s ability to complete a project. What kind of team do they have? Is there an internal back-office function? These are other factors they could consider.

How much do they cost?

Usually, a company takes 24 to 48 hours to approve an application. The exact cost varies between 0.5% to 1.5% of the contract price. The overall cost depends on the coverage an owner demands for a project and the warranty timelines.

The contract’s duration also plays a role in the bond’s total cost. Surety companies usually charge premiums for projects exceeding one year while having special prices for large projects. 

What happens if you don’t complete a project?

If you back out of a project or leave it incomplete, violating the contract’s obligations, the owner will file a claim against you. The surety company will examine the claim’s validity and whether the owner was justified in filing it.

If they are, the company will fulfill the contract terms while compensating the owner for the financial losses. They might complete the project by offering technical, managerial, or financial passports. If that’s impossible, they will find a new contractor to handle the task. 

How to choose a broker?

Ask them which surety companies they have contacts with and how many years of experience they possess. It would be better to inquire about their fees and how fast they can help you get the document.

As a contractor, you will require performance bonds to get more projects, a competitive advantage, and a high trust amongst project owners. Finding a surety broker is the best way of getting this document.