FinCred is an expert in the area of surety bonding. As a broker for this financial product, we can explain the details of a performance bond agreement, and help you find the best solution for your company.
What is A Performance Bond?
A performance bond is a guarantee to the employer, project owner or main contractor of the performance of the contractual obligations of the contractor or subcontractor.
If you are a contractor, you may be required to purchase a performance bond. A performance bond protects a project owner who has contracted work to you. Should the work not be completed, or the terms of the contract be broken by the contractors, the insurance company or surety will cover the project owner’s losses up to the value of the bond. A performance bond is a type of surety bond.
How Much Will A Performance Bond Cost?
The cost of a performance bond will vary depending on a number of factors. The insurance company or surety will assess your accounts, the work that requires completing, the current workload of your company, and details about your bank.
The final cost will depend on factors such as your financial strength and the level of protection afforded to the obligee.
How Do Performance Bonds Work?
Performance bonds are purchased by a contractor from an insurance company or surety to protect their client. The bond documents are given to the client who can activate the bond in the event that they suffer loss due to actions of the contractor. They can usually receive up to 10% of the contract value from the bond as compensation (which they may choose to use to assist them in finding a new contractor).
See our explanation of surety bonds for more detail about the parties involved and their roles in a performance bond.
History of Performance Bonds
The idea of surety (one party being legally responsible for the debts or actions of another) has been around since ancient history. The earliest known surety contract was carved into a Mesopotanian tablet, almost 5,000 years ago.
The tablet described a situation in which one farmer was sent to war, so could not tend his fields. A second farmer agreed to take on the work in exchange for some of the profits. A local merchant vouches for the second farmer. Should the work not be completed, the merchant will pay amends to the first farmer.
You can see from this story the three parties that are involved in a surety bond or performance bond. The first farmer is the obligee (the person that is owed something). The second farmer is the principle (who does the work and seeks a surety as assurance for the obligee). The merchant is the surety (who will pay the obligee for losses if the principle fails to carry out the work).
The surety arrangement has been a fundamental and essential form of contract that has enabled smooth business throughout history.
Any other questions?
Contact FinCred today to find out more about performance bonds and receive a quote today.
