Why Performance Bonds are Important

First, what are performance and payment bonds?  A bond is a three party agreement between the owner (e.g. a museum), the contractor (e.g. Taylor Studios), and a surety company (e.g. Travelers Casualty Insurety Company).  The surety company assures the owner that the contractor will perform the contract.  A performance bond protects the owner from financial loss should the contractor fail to perform.  A payment bond assures the contractor will pay its employees, subcontractors, and vendors.  Often these are combined in one bond.

Second, why would I (an owner of a design/build firm) encourage potential clients to require performance bonds?  This comes from personal experience as a subcontractor.  On one project the prime contractor was over a year late in paying us (a subcontractor on this particular project) for a large final payment on a contract.  The museum did their best to help us.  The city that was paying the contractor was not helpful.  One phone call to the surety company got our check in the mail within a few weeks.  On a second project the federal owner (museum) had not required the prime contractor to acquire a performance bond, even though it was in the prime contract agreement.  This prime contractor went out of business.  We had no surety company to call to be paid for our progress on the project.  The museum also did not have a surety company to call to compensate them for any payments they had made to this now defunct company.  The surprising thing is that this same museum’s contract with a new company also does not require a performance bond.

Third, what are some reasons to obtain a performance bond?  On many projects it is the law.  The Miller Act requires a contractor on a federal project to post two bonds: a performance bond and a labor and material payment bond.  Almost all states also have similar requirements on public work projects, these are often called “Little Miller Acts.”  It seems these laws are ignored from time to time.

A second reason to obtain a performance bond is the assurance you as the owner will get that the company you hire is capable of completing your project.  The surety company does extensive analysis of the company prior to bonding them.  If the company defaults, the surety company will fulfill the contract.  If the company you are considering is not capable of getting a bond it tells you something about their financial and business stability.  In the construction industry, there is a 30% failure rate, it is a risky business.  I know of many companies in the industry that would not be able to take on projects if the clients had required performance bonds.

Finally, why do most not require performance bonds?  I assume it is the cost of the bond.  They typically cost one to three percent of the total contract amount.  I must admit when we are the prime contractor and I know we are not going out of business, we pay our subcontractors, we are financially stable… I’d prefer to spend those dollars on more exhibitry for our clients.

You can learn more about bonds at this website:  www.sio.org.

Posted by: Betty


I'm not sure what you mean? When you buy a bond it is a one time lump sum payment for the project. Normally those bonds are kept on record by your insurance company and you cannot go over your maximum bond limit. If you mean can you lower what is bonded since the project is more complete, I don't believe an insurance company would do that.


Can we reduce the value of the Performance Bond towards the end of the Contract Period?