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Performance Bonds: How Do They Work?


Say a corporation opts for a certain contractor-based project, accompanied by considerable costs and time limitations. What is to confirm that they will not face any troubles regarding these aspects from the contractors?

Given the likelihood of incompetence and wrongdoing in high-risk projects, businesses are wary of hiring contractors.

Fortunately, most of these concerns can be settled by opting for a performance bond, which serves to protect both the contactor and the client.

Protection Ascertained

A performance bond is essentially a guarantee that a contractor will complete their work appropriately, with regard to required performance levels and predetermined deadlines.

This type of surety bond has been employed by business for long time now, and for good reason—the bond incorporates a certain level of security by holding the contractor accountable for any losses.

What Parties Are Involved?

The process of writing a performance bond typically involves three participants:

  • The contractor, or the ‘principal’, who fulfills the amount of the bond
  • The owner, or the ‘obligee’, who owns the business, home, agency, and is protected by the bond’s terms
  • The performance bond agency, which issues and approves of the bond

Once the contractor completes the project within owner’s guidelines, the performance bond becomes inoperative.

If they don’t, the owner can counter the performance bond, resulting in an investigation conducted by the bond agency.

If the contractor is found negligent, the claim is deemed valid and the surety company compensates the owner’s losses, either financially or by assigning a new contractor to complete the task.

The contractor is obligated to reimburse the surety company for any payouts.

How Much Does A Performance Bond Cost?

A contractor generally fulfills 2% to 4% of the project cost. For instance, if a project amounts to $10,000 with 2.5% of amount for the bond, the contractor pays $250.

Keep in mind that this bond is not the same as insurance. The principal (the contractor) is responsible for concluding any payouts, not the surety agency. And unlike insurance, the bond-writing process does not involve any hefty premiums.

Why go for this underwriting service?

Simply put, the performance bond is used to establish good faith between the contractor and the client; it provides a safety net of sorts for both parties, and adds to the contractor’s market reputation.

Given the plentiful advantages, it is wise to get a performance bond when you take up a new contract. Consider the underwriting services of BondPro – the online bond agency has its reach in the business worlds of several states, including California. They provide flexible rates and efficient processing for several types of court bonds, including performance bonds.

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