There's not a business around that doesn't want to get ahead. However, it takes having the proper tools to do so. If your company is interested in bidding on both construction and private contracts, you'll need to get a performance bond. Any federal or state-financed construction project over $150K requires a performance bond. It doesn't stop there either. Even commercial projects for manufacturing and service as well as supply work require performance bonding.
What Is A Performance Bond?
A performance surety bond is also considered a contract bond. It is issued by a bank or an insurance company as a guarantee for satisfactory completion of a project by a contractor. The bank or the insurance company acts as the surety. Securing a performance bond can cost 1% or more of the contract value. However, the benefits far outweigh the cost. A performance bond is issued to one party on the contract in the event that the other party fails to meet the terms and obligations outlined in the contract. This bond serves as a guarantee. The bond pays the obligee if the principle party fails to meet the obligations outlined in the contract.
How Do You Secure A Performance Bond?
You must apply for a performance bond. Your application must include:
- A balance sheet
- Income statement
- Cash flow statement
- Complete notes
- Disclosures as well as work schedules
You must select the state you want to be bonded in and choose the type and the amount of the performance bond you are seeking. In order to secure the bond, you are required to pay anywhere from 1 to 15% of the total bond amount. The rate can be determined by your credit score. However, high-risk or construction bonds can cost as much as 10% of the value of the bond. However, they bring peace of mind with respect to projects you're involved with.
At NFP, we have made the performance bond application simple and easy. Simply contact us, and we will make sure you are properly bonded and insured. We work with companies on all sizes of projects. We also have a large amount of in-house bonding options we can offer our clients.
Who Needs A Performance Bond?
Performance bonds are essential for anyone involved in large-scale projects where trust and accountability matter. If you’re a project owner, general contractor, or subcontractor bidding on federal or state-funded construction jobs over $150,000, the law requires you to secure one under the Miller Act. Many private-sector projects also request performance bonds to ensure work is completed as agreed. Even when not mandatory, obtaining a bond can build credibility, protect your business interests, and give clients peace of mind that the job will be finished on time and to specification.
What is the Miller Act?
The Miller Act, passed in 1935, is a federal law that requires contractors on federal construction projects over $150,000 to provide two types of bonds: Performance Bond and Payment Bond. These bonds protect the government and subcontractors from financial loss if the contractor fails to perform or pay. Many states have similar laws for state-funded projects.
Performance Bonds vs. Payment Bonds
While both bonds are often required on large projects, they serve different purposes:
- Performance Bond: Guarantees that the contractor will complete the project according to the terms of the contract. If the contractor fails to deliver, the surety steps in to ensure the project is finished, either by funding completion or hiring another contractor.
- Payment Bond: Ensures that subcontractors, suppliers, and laborers are paid for their work and materials. This protects everyone down the supply chain and prevents liens against the project owner.
A performance bond protects the project owner from incomplete or poor-quality work, while a payment bond protects subcontractors and suppliers from non-payment.
What Industries Require Performance Bonds
Bonds are used predominantly in the construction industry and real estate industry where they safeguard large-scale building and development projects. However, their use extends far beyond construction. Industries such as manufacturing, supply chain, and service sectors often require bonds to ensure contractual obligations are met. Even specialized fields, like janitorial services, insurance adjusting, and commodity sales, may mandate bonding to protect against incomplete work, poor quality, or financial default. In short, any industry where projects involve significant risk, high value, or strict compliance standards can benefit from performance bonds.
