Top 7 Questions About Performance Bonds
Over the years, we have noticed the same handful of questions being asked by our clients with respect to performance bonds. So, we thought we’d identify and answer the top 7 most frequently asked in the post below.
How Much Does a Performance Bond Cost?
The cost of a performance bond depends on several factors. The first factor is the percentage of performance bond requested by the owner which is typically 100%, 50% or 10% of the contract price. The higher the percentage, the higher the rate. The second factor is the strength of the company’s financial statement. A company with strong financials is perceived as a lower risk and commands a lower rate. The third depends on the amount of bond premium produced on an annual basis. Rates are generally lower if you produce more bond premium. Having said all this, standard rates for performance bonds are as follows:
100% performance bond = $10/$1,000 of the contract amount
50% performance bond = $7/$1,000 of the contract amount
10% performance bond = $20/$1,000 of the bond amount (note: not the contract amount)
From most expensive to least expensive, bond rates are categorized as non-standard rates, standard rates, semi-preferred rates and preferred rates. Each company has a slightly different take on those categories but they are generally similar across the industry.
How Do I Calculate Performance Bond Premium?
Bond premiums are relatively straight forward to calculate. In Canada, the premium is calculated as a rate per $1000 of the contract price including HST. A standard 100% performance bond rate is $10/$1,000. In the case of a $1,000,000 contract with 13% tax, the premium is calculated as follows:
($1,000,000 *1.13)($10/$1,000) = $11,300
A surcharge is applied to the base rate for certain items, such as an extended maintenance period, design build contracts, or contracts that exceed one year. For a more complete breakdown of performance bond costs, check out or blog post on surety & performance bond costs.
How Do I Get a Performance Bond?
Performance bonds are issued by insurance companies also known as surety bond companies. In order to obtain a performance bond, a contractor must first qualify for a bond facility. In order to apply for a bond facility, a list of information that outlines a company’s experience and financial performance must be submitted to the bond company allowing them to evaluate a contractor’s ability to complete the work guaranteed by the performance bond.
The bond company’s list of information includes the contractors most recent CPA prepared year end financial statements, personal net worth statement of the shareholders, a contractor’s questionnaire, corporate structure and a work on hand schedule. For more details on how to qualify for a bond facility, check out our blog on your first surety bond meeting.
Is It Mandatory To Provide a Performance Bond?
Project owners will specify their security requirements in the tender or contract documents. If a performance bond requirement upon contract award is stipulated, then it is a mandatory contractual requirement. If a contractor fails to provide a performance bond upon award of the contract, the owner will bypass the bidder and award the second lowest compliant bid. It is important to note that projects requiring a performance bond almost always require a bid bond in the tender stage. If a contract is awarded on a bid that included a bid bond, and the contractor refuses to enter into the contract, a claim against the bid bond can be made by the owner.
How Is a Performance Bond Different From a Labour & Material Payment Bond?
A performance bond guarantees the performance of a contract according to the terms and conditions of the contract itself. A Labour and Material Payment Bond (L&M) is usually asked for in conjunction with a performance bond and is a guarantee that subcontractors and suppliers with a direct contract to the contractor are paid for the work and material they supply to the job. The L&M bond is meant to provide protection to subcontractors in addition to their lien rights. If you’re interested in learning more about labour & material payment bonds, head on over to our L&M blog post.
What Is The Difference Between a Performance Bond and a Bid Bond?
The main difference between the two bonds is that a bid bond is given with a tender at the bid stage to secure the bid and ensure it is given in good faith. If a contractor is awarded the contract and doesn’t enter into a contract, a claim can be made against the bid bond. A performance bond is required once a project is awarded and it guarantees the performance of the contract. Bid bonds are typically issued in the amount of 10% of the tender price whereas a performance bond is typically 50% or 100% of the contract price.
Where Can I Get a Performance Bond?
Although they are issued by insurance companies, a contractor seeking a performance bond will almost always need to go through a broker. Due to the involved nature of the bonding process, a surety broker helps educate the contractor and assemble the package of information needed to make a submission to the bond company. With a large number of markets offering surety products, having a broker can make all the difference in obtaining the bonding limits you require at preferred market rates.