Construction Law

Everything You Need To Know About Performance Bonds featured image

Everything You Need To Know About Performance Bonds

If you are a construction contractor considering a performance bond, there are some critical things to note, including legal significance and cost of a performance bond. As experienced Birmingham contractor attorneys, we will share and review everything you need to know about a performance bond.

How Do Performance Bonds Work

Performance bonds provide legal and financial protection for contractors. When working on a construction project, the contractor secures this bond to guarantee their work performance. Performance bonds guarantee that a contractor will complete all facets of a project according to the contract. If a contractor fails to uphold their end of the deal, then the performance bond will require the bonding company to fulfill all facets of the contract. If you’re unable to complete the job, the bonding company who is responsible for paying the bond’s value may put the job out to bid with a few contractors or complete the work themselves.

Regulations Protecting Performance Bonds

Federal, state, and local laws all mandate that performance bonds be utilized for most public projects. The Miller Act dictates the use of performance bonds for all projects in excess of $100,000. Some public projects insist on them because they guarantee payment for material suppliers, subcontractors, and contract duties.

How Much Does a Performance Bond Cost?

The cost of a performance bond is a small percentage of the full contract amount. Larger contracts are usually around 1 percent and smaller contracts have fewer requirements but are priced at 3 percent of the full amount. Your performance bond cost should be included in your bid, so you don’t end up paying for your bond.

Performance bond rates vary based on the project’s total cost and the contractor’s credit and financial history. Contractors with good credit and financial history can expect to pay a fee in the amount of .5 percent to 5 percent of the bond’s full value to get the bond. Your personal credit business financials will be reviewed when being considered for a performance bond and determining your rate. The better your business finances are the lower your performance bond rate will be. It’s possible to get performance bonds for a public job if you have personal credit issues. However, if you need a performance bond for a smaller contract (about $350,000 and under) you are based strictly on personal credit and your credit issues cannot be bad.

If you would like to speak with a Birmingham contractor attorney, please submit our contact request form.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.