A Contractor Bond is also sometimes called a Performance Bond. These bonds are a form of insurance issued by a bank or an insurance company to guarantee the proper completion of a building project by the contractor. It is quiet common for a client to insist on such a bond to be put in place in favor of the client prior to construction beginning. In the event of a contractor failing to complete the building due to insolvency or if the building is not completed in line with the clients specifications the client will then be compensated for losses up to the value of the bond.
The bond therefore exists to cover the client’s losses, for example if they have to engage another contractor to complete the building or to bring it up to final specifications. A Contractor Bond will not necessarily cover the full cost of the building contract. After all and in the unlikely event of the contractor going out of business before the first shovel is turned, the loss to the client will be small. Instead the Contractor Bond will normally cover between 10% and 25% of the total contract value. Here is a look at different bonds.
A Contractor Bond is mandatory in many countries, including the USA, for any Federal or Government contracts. There are a number of types of Contractor Bonds, for example Payment Bonds guarantee that all sub-contractors, laborers and suppliers will get paid.
Maintenance Bonds will provide a warranty for work done for a specific time period after completion. So how much does a Contractor Bond cost. ? The cost is usually less then 1% of the contracted price although if the contract is less then $1 million then the premium may run to 1% -2%. The credit worthiness of the contractor will also impact on the price.
Companies that are deemed to have a higher risk, perhaps a new start-up with limited history or a contractor who has a track record of issues will be charged a higher rate for a Contractor Bond. It is important therefore that when pricing a project, the requirement for a Contractor Bond is understood and the cost of these Bonds is built into the pricing.
The most likely reason for a Bond to be called upon is in the event of the Contractor going insolvent and ceasing business. Whilst this does occur, thankfully it is rare. Like all insurance contracts the hope is always that there will never be a need to make a claim.