It would be beneficial to have performance bonds from contractors. But, first things first; performance bonds are legally binding contracts that involve three parties. They are issued to ensure that one of the parties complies with the terms mentioned in the contract. The three parties involved are the Obligee, who benefits from the performance bond, the Obligor who is generally the contractor obligated to perform according to the contract, and the Surety Agency which produces the bond and makes it official.
There are several different reasons why you should ask contractors for a performance bond and the reasons are solely based on guaranteeing performance in all its aspects (hence, the name performance bond). Here are some of those reasons:
Ensures Quality Work Performance
Once a performance bond has been approved, it drastically improves the quality of work that’s going to be delivered as the contractor must deliver the specific needs requested in the contract. This ensures that the owner will be compensated if the quality of the work was less than what they requested. This makes the building process stress-free for the owner of the property as they are guaranteed to receive what is mentioned in the contract they signed.
Required in Government Contracts
Performance bonds are a compulsory requirement for any government-issued contract. This is due to the Miller Act and this protects the Obligee against any losses in either time or money. While this isn’t required in private party agreements, it still comes in pretty handy.
Guarantees Compliance With Time Allocated
The time frame agreed upon in the contract is held binding the moment a performance bond is issued. This helps the Obligee guarantee that the contractor is abiding by the schedule since one of the most important aspects of any construction work is the duration of time the project takes. The less time a project takes, the faster you can reap the rewards of the completed work. That is why having a performance bond can be a great incentive for the parties involved to complete the project within the agreed-upon time frame regardless of any hurdles along the way.
More Sustainable Than Insurance
Insurance functions solely on the idea that something may potentially go wrong and then you will be compensated for it. However, performance bonds function primarily on the assumption that all parties will comply with their end of the contract. Many websites offer more information on this subject; the difference in rates between insurance and performance bonds along with guides toward which one your business most likely requires.
Improves Trust Between the Contractors and Owners
The moment you ask for a performance bond from the contractor, there will be no room for error as both parties must comply with the terms of their contract. This makes the project flow much smoother as it establishes certainty for both sides — the contractor will be paid for their work and the owner will receive the desired quality on the schedule mentioned in the contract. If not, they will be compensated for it by the third party guarantor present in the bond.
It is Quite Affordable
Getting a guarantee on the quality of work that you are asking your contractor for is extremely cheap to get as the rates for bonds are very low. The best part is that the larger the project, the lower the percentage of the performance bond. The rates are generally between 1-5%; however, they can drop below 1% for huge projects. This makes it an extremely viable way to assure the time frame and quality of your project in comparison to an insurance company that has rates as high as 40%.
Easy To Get
At first glance, it may seem like a performance bond is just an added amount of paperwork that takes weeks to process, but that’s not the case at all. These performance bonds can be processed online within 1-2 business days for a smaller project, and a few more days for a larger project as extra information is required.
Having a strong base is the essence of building any infrastructure to make sure it doesn’t collapse, and that can also be applied to the legally binding contracts included in that infrastructure. Having a solid safety net that will guarantee that you receive the terms laid out is a necessity when negotiating with your contractor. That is why you need to ask your contractors for a performance bond as it’s a little added cost that yields guaranteed returns without any added risks.