What is a Performance Bond?

A performance bond is a written assurance or guarantee form provided by a third party (bank or insurance company) and submitted by a principal (Client) to the Contractor in charge of giving the contract.

This guarantee form censored by the third party (bank) is an insurer of the principal who has won the contract to exclusively performs and completes his job in due time, and if he/she is not able to do so, then there is a stated and agreed payment he/she is to pay back to the Contractor.  Here is a closer look at performance bonds.

Why Do I Need a Performance Bond?

For every contract I would like to win as a contractor, I need a surety that guarantees that I was a contractor is very much capable of successfully completing a project or contract. This surety backs you up, thereby giving you an edge in every company dishing a contract or a project out.

How Do I Get a Performance Bond Approved?

Getting a performance bond can be very overwhelming at times, being that there are series of forms and information required. Denial of a performance bond after all the time and money spent can be very upsetting sometimes; can even cost you your contract.

So how do you get this closed door opened for you?

In the application of a performance Bond, there are vital qualifications needed. These qualifications encompass Experience, Financial Strength, and Financial Presentation.


‘There’s no best teacher like experience’. For a performance bond to be approved, the financial institution takes a look at your experience level, knowing that this reveals your skills, character and your ability to complete the project. Most times, performance bond are approved to companies with three years experience.

Financial Strength

For a company to run smoothly without any hitch and glitch there must be sufficient working capital and a handsome net worth should in case. Financial institutions take the good and close look into this by trying to calculate the limits and capability of your company financially.

Financial Presentation

For any work to be approved there must be the proper presentation. There is an aligned format mapped by financial institutions, and once your financial presentation is not given a pass mark, no matter how strong your company is financially, you’ll be denied a performance bond.

For example , financial institutions accepts a tax return or a simplified financial report for bonds lesser than a $1million dollars while for bonds above this amount, the financial institution requires a reviewed financial statement from the Contractor, as this tends to increase your level of assurance and also gets you much more qualified for an approval.

Although there are other factors that are needed in earning an approval of Performance Bond, They are Credit scores, Personal assets, Bank line of credit and so on. Though essential, they can’t be compared with the above factors needed in securing a performance bond.

Types of Contractor Bonds You May Need

Contractor bonds protect the customers from a contractor not completing the job, it offers the client the security that they will be paid if the contractor defaults.  For the most part bonds are classified into two different categories, conditional or demand.  Conditional bonds are common and they serve as proof there will be no resulting loss.  Contactor bonds off the financial assurance that the bills are going to get paid.  The insurance companies or bank that issues the bond will give the customer their guarantee that the commitment of the contractor will hold up.  Construction bonds shield the owner against poor work as well.  There are actually three types of construction bonds, payment, performance, and bid bonds.  Let’s have a look at them.

  1. Bid bonds

The purpose of this type of bond is to protect the client if the contractor doesn’t honor the bid.  Cost overruns have been a huge problem in the construction industry and the bid bond helps to rein in that type of fraud.  Under this type of bond the client has the right to take legal actions against the contractor if the contractor fails to honor the bid.  If there are cost overruns then the insurance company or bank is responsible for them.  That can include having to hire a replacement contractor should it be needed.

  1. Performance bonds

This type of bonds gives you a guarantee that the contractor will be responsible for the completion of the project as outlined in the contract.  The bond is held in place until the project is deemed as complete.  If the contractor cannot finish the job, then the bond holder has to hire a new contractor to get the project finished.  It is also their responsibility for any financial costs because the contractor didn’t complete the job.

  1. Payment bonds

Payment bonds are put in place to make sure that everyone associated with the job gets paid.  This will include any sub-contractor, suppliers and staff.  These bonds will be asked for if you ever decide to bid on any government contracts and you will need to have them in place when you submit your bid.

If you are new to the construction industry with little or no experience under your belt you may struggle to get a contractor bond.  You need to demonstrate that you have the right skills, resources and the ability to get the construction project done.  The insurance company will want to look at your financial records before issuing the bond, these records will include bank statements and credit history.