Performance Bonds

Pole Barn Guru Blog

Performance Bonds for Post Frame Buildings and Barndominiums

Don’t get me wrong, most post frame and barndominium building contractors are honest folks who just love to make their clients happy. I, for one, get tired of reading horror stories of folks who have been ripped off by those who are not so scrupulous. And every rip-off builder makes it harder for honest contractors to be trusted.

Here is a solution for all – performance bonding.

These bonds provide a guarantee a construction project will be satisfactory completed, and a contractor will live up to all bond specified terms, to project owner’s satisfaction. Company selling bonds to a contractor is known as a surety company, and as collateral for backing a bond financially, a surety company will often require some form of property or equipment.

Surety companies can be either financial institutions such as banks, or they can be insurance companies making bonds available to contractors who apply for them.

How Do Performance Bonds Work? 

Both government and private sector companies require performance bonds as protection against noncompliance, or failure to complete a project by a contractor. When a contracting company fails to live up to its obligations on a project, and for whatever reason, cannot complete specified body of work, the bonding company may be obliged to pay for project completion, or secure the services of an alternative contracting company for project completion.

Bonds include terms contractor must live up to, and constitute project owner’s evaluation of what constitutes a complete project. If a contractor fails to meet any of these terms, construction job owner would then have the option of making a claim against bond, to recover any incurred losses.

If it turns out contractor would be bankrupted by having to pay the amount of any claim against him/her surety company is left as sole responsible party for making up any losses to project owner. Because there is so much at stake in this type of bond, terms and language used must be very specific, because as often as not, a case like this can go to court, where performance surety bond terms are subject to legal interpretation.

When a Bond Obligation is not Met 

When terms are not entirely fulfilled by a contractor, project owner is within his/her right to make a claim against the bond to recover any resultant losses. Initially, surety (company) is responsible for paying this amount to the project’s owner, assuming this claim can be validated, either privately or through legal means.

In many cases, however, bonding company would then have the option to pursue contractor to recover this same amount of money, since contractor’s failure to comply caused a claim to be made. It will depend on whether or not language is included in a bond, a bonding company has this option to pursue defaulting contractor.

When this language is written into performance surety bond, and surety bonding company requires a contractor to repay amount of a claim, a contractor is legally obliged to do so. If paying a claim would push contractor into a state of bankruptcy, bond issuing company would then have no recourse for being compensated for its losses, and would then have to absorb any financial setback. For this reason, surety companies make a point of thoroughly screening applications from contractors who are interested in purchasing this kind of bond.

PERFORMANCE BOND COST:

Almost every contractor who successfully bids on a construction project should have a surety bond in hand, simply because a project owner will require this kind of assurance job will be completed. As a general rule of thumb, a contractor can anticipate a surety company will impose a charge of roughly 1% of the total contract value as a cost of a bond itself.

Contractors who appear to be relatively unstable financially will, of course, be charged a higher amount for a bond than would a financially stable contractor with a good credit history. 

How to get a Performance type Bond 

Obtaining a performance bond is a relatively easy process, assuming the contractor does not have a bad credit history, or is considered financially unstable so a bond issuing company would be reluctant to take a chance. For credit-worthy applicants, this process is fairly simple, beginning with selection of a reputable bond company.

After having selected a surety company, a contractor can go online and apply on provider’s website. This application will be reviewed, and more than likely, a comprehensive check into the contractor’s credit history and financial condition will be undertaken by bond issuing company, to protect themselves against loss.

Assuming this application is approved, an indemnity document will be sent to the contractor, to sign before a notary, and then return indemnity agreement with application fee. Upon receipt of contractor’s indemnity agreement plus a fee, bonding company will then issue the bond and conditions will be in effect from then forward.

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