How to get a performance bond for your business

A performance bond is a financial guarantee that the surety (an insurance company or a bank) gives for the completion of construction projects. Most of the times, the projects for government and public sector require a performance bond. It guarantees that the principal (contractor) will complete the project for the obligee (project owner) according to the project specifications.

These specifications include the budget, timelines, and work quality that the contractor mentions in the bid. If the principal fails to complete the project, the obligee can claim compensation from the surety to recover the losses.

Application process to get the Performance BondThe contractor applies for the performance bond only after he wins the bid for the contract. Usually, contractors engage a professional broker or agent to streamline the process for them. The application process involves the following steps:

  • The contractor’s company should be fully set up and actively engaged with the surety company.
  • They should provide the award letter issued by the project owner to their broker. The award letter is the written confirmation of the bid given to the contractor who has bagged the project.
  • They need to submit more documents including the financial statements such as balance sheet, cash flow statement, income statement, current project details, and workflow statement. It is recommended that they should provide statements for the last three years to maximize the chances of getting approval. These documents should preferably be prepared by a CPA (Certified Public Accountant) as it adds to the credibility of the contractor.
  • The contractor should clearly communicate the number of days that he has to get the bond to the broker.
  • Finally, he has to pay the bond premium. Following this, the broker procures the bond and delivers it to him within a specified period of time.
The presentation of relevant documents is essential for the surety to provide the bond without hesitation. Insurers prefer to work with contractors, who have a good track record along with a decent cash flow and consistent profitability. A weak and debt-ridden balance sheet is a major red flag and insurers fail to approve such bond requests. Even if they do approve them, they charge a high premium to set off the risk involved. Factors influencing the cost of a Performance BondIt is vital for a contractor to know the cost of the performance bond as it directly influences the project budget. However, the cost is completely justified as it saves the contractor’s working capital and adds credibility to his presence. The following factors play a key role in determining the cost of the performance bond:
  • Contract size and type
  • Overall bond amount
  • Surety company chosen
  • Province where the contract is to be carried out
  • Contractor’s history and credit
  • Agent/broker fees
Every project is unique and has different requirements when it comes to getting g performance guarantee. If you are looking to get one for a construction contract, you need to understand what really would work for you. You can speak to an expert or see more at Swiftbonds, the leading online surety bond provider.

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