What is a performance bond?
A performance bond is a type of guarantee for contracted work. If you’ve been asked by a client to provide a performance bond, you will need to apply for one with an insurance company.
The performance bond acts as financial ‘promise’ that you will fulfil your contractual obligations and deliver on time. If you fail, the insurance company will pay the amount agreed in the bond to the client. This will enable them to complete the project.
What information do I need to provide when applying for a bond?
This will vary depending on the insurance company and the type of project.
In general, you can expect to be asked for details about your current contracts and any work in progress you have.
You may also need to supply information about your financial circ*mstances, such as:
- bank statements
- your latest published accounts
- details of cash flow and financial resources.
If your assets do not exceed the value of the performance bond, it doesn’t mean you won’t be granted one. However, you may need to supply additional information, such as what other assets are available (i.e. personal assets or other linked businesses).
You will also need to provide information about the contract in question, including:
- the value of the project
- the time frame envisaged (i.e. when the project is due to complete)
- any other specific requirements of the client.
What happens next?
The insurance company will normally have access to a variety of bond providers, to whom they will apply on your behalf.
Based on the information you have provided they will let you know whether you’re eligible. If you are, they will provide a quote for the cost of the performance bond.
What is the cost and how is it calculated?
The cost of a performance bond is normally calculated as a percentage of the value of the contract, and with reference to the length of the period to be covered. For longer projects, there may be a slightly higher cost.
A typical performance bond is normally about 10% of the contract value, but this can vary. The exact amount will depend on the individual contract and factors that affect your credit rating.
FAQs
The cost of a performance surety bond can vary by the type of bond and the client, but a good rule of thumb is that it costs one to three percent (1-3%) of the contractual amount. The cost of a performance bond may go up by 1.5% to 2% on riskier contracts, or down even lower if your financial rating is stellar.
How does a performance bond work in construction in the UK? ›
Performance Bonds / Contract Bonds are a type of Surety Bond and are written promises to pay for direct loss or damage suffered by a third party as a result of a breach of contract and are typically issued for 10% of the contract value.
What is the performance of a bond? ›
A bond pays a certain rate of interest at periodic intervals until it matures. An investor can use cumulative interest to calculate a bond's performance by summing the interest paid over a set period. However, there are other more comprehensive methods, such as effective annual yield.
What is a 100 percent performance bond? ›
Significant payment and performance protection can be achieved with 100% performance and payment bonds. The full contract value is available to cover the excess costs of contract completion and, in most instances, an additional 100% of the contract value is available to pay the claims of subcontractors and suppliers.
How is your bond calculated? ›
The discounted cash flow method is one of the most widely used methods to value a bond. In this method, the cash flows received from the bond (i.e., coupon and par value) are discounted at the market rate. Then the present value of all the cash flows is summed up to get the value of the bond.
How is bond fund performance calculated? ›
Yield of a bond fund measures the income received from the underlying bonds held by the fund. The 30-day annualized yield is a standard formula for all bond funds based on the yields of the bonds in the bond fund, averaged over the past 30 days.
How do you value a performance bond? ›
The cost of a performance bond is normally calculated as a percentage of the value of the contract, and with reference to the length of the period to be covered. For longer projects, there may be a slightly higher cost. A typical performance bond is normally about 10% of the contract value, but this can vary.
What is the percentage of a performance bond? ›
Typical cost of a Performance Bond
Rates for performance bonds can differ depending on the qualification of the contractor, as well as type and size of the contract. The rate paid is typically a percentage of either the contract amount or bond amount. The average rates and costs can range from 1% - 5%.
What does 10% performance bond mean? ›
Bonds are typically set at 10% of the contract value. This compensation can enable the client to overcome difficulties that have been caused by non-performance of the contractor such as, for example, finding a new contractor to complete the works.
What is an example of a performance bond? ›
In short, performance bonds guarantee that you finish what you start, and that the client is satisfied with your work. For example, if you're a contractor on a construction project, your performance bond would legally “bond” you to stipulations in your contract with the property owner.
In order to get a performance bond, the contractor agrees to pay the surety a small percentage of the total bond amount, usually between 1% and 4%. In exchange, the surety promises to pay up to the agreed bond amount if the contractor fails to deliver on its obligations.
What are the two types of performance bonds? ›
Are there different types of performance bonds? There are two main categories: 'on demand' bonds and 'conditional' bonds.
What is performance bond margin? ›
Performance bonds, also known as margins, are deposits held at CME Clearing to ensure that clearing members can meet their obligations to their customers and to CME Clearing. Performance bond requirements vary by product and market volatility.
What is the equivalent of a performance bond? ›
A public works bond is the equivalent of a performance bond but is usually required on the state level for public construction jobs. This may be required for state projects, federal projects, or other public projects.
What is the difference between a guarantee and a performance bond? ›
On Demand (Payable on First Demand): Unlike a guarantee bond, an on-demand performance bond is usually provided by the contractor's bank and allows you to make a claim and receive compensation from the surety company without having to prove or demonstrate that the default has occurred.
