Contractor Performance Bonds: Safeguarding Projects

Performance bonds, also known as contract bonds, are a common requirement in construction projects. Merchants Bonding Company's surety-only focus and common sense underwriting philosophy make us a leading source for fulfilling contractors' bonding needs.

What is a Performance Bond?

The performance bond is a legally binding contract between the surety, the contractor (principal), and the project owner (obligee). The contract outlines project details and timelines agreed upon by all parties.  

How Do You Get a Performance Bond? 

Merchants Bonding Company issues surety bonds through insurance agents, per insurance industry regulations. Use Merchants' Find An Agent tool if you don't have one. Agents guide contractors through the process, explaining required documents and information needed to underwrite the bond.

How is the Bond Size Determined?

The bond size is typically 100% of the total contract price, ensuring comprehensive coverage for the project.

What Happens if a Contractor Violates the Bond Terms? 

If the contractor doesn't abide by the terms of the contract, and fails to complete the project, the project owner can file a claim to cover losses they incur. The contractor, per the indemnity agreement, is then obligated to pay back the surety company for the amount of the claim. 

Importance of Performance Bonds

Surety bonds protect on many levels. Performance bonds help protect project owners from financial losses, ensure work quality with specified standards, and maintain project timelines.

 

Key Features of Contractor Performance Bonds

  1. Protects project owners from financial losses due to contractor breaches.
  2. Ensures projects are completed on time and according to agreed specifications..
  3. Attracts qualified contractors for project bids.
  4. Reduces the project owner's risk exposure.
  5. Surety company investigates and pays valid claims.

Understanding Surety Bonds

A surety bond is a three-party agreement that ensures the fulfillment of a commitment or contract. For instance, the surety (Merchants Bonding Company (Mutual)) may provide a surety bond to a construction company (the principal) which is required by the state (the obligee), ensuring the construction company will perform the duties as outlined in the contract. In bonding the construction company, Merchants assumes the risk should the company default or not fulfill their contract. A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.