Construction companies must agree to an arrangement or a contract in which they are obliged to complete the task according to specific guidelines. This is because construction projects often involve large sums of money, and something can always go wrong. The main purpose of a construction performance bond is to protect the company from financial loss if the assignment is not accomplished as agreed upon. For example, in Ontario, all construction projects worth more than $500,000 must have a performance contract to be eligible for public funding. This requirement is in place to protect taxpayers from being on the hook for any cost overruns that may occur.
Here is the information if you want to know about the businesses that need to get surety bonds and their advantages.
What is a Performance Bond?
It is a type of surety bond required to obtain financing for a construction project. It essentially guarantees that the project will be completed timely. If the project is incomplete, it will provide funding for the completion of the project.
It is typically issued by a surety company, which is the one that provides this type of financial guarantee. The surety company will usually require some collateral before issuing any contract, such as a letter of credit or cash deposit.
The amount is a percentage of the total value of the construction contract and will vary depending on the project. For example, a smaller project may have a bond worth 10% of the contract value, while a more extensive project is worth 20% of the contract value.
What Types of Companies Need Performance Bonds?
Construction companies are typically the type of businesses that need to obtain a construction performance bond. However, other companies may be required to obtain it. These can include:
- Janitorial services companies
- Landscaping companies
- HVAC companies
- Tree cutting companies
- IT services
- Security companies
- Cleaning companies
- Waste management companies
- Snow removal companies
- Auto repair companies
The specific requirements in the contract will vary depending on the jurisdiction in which the company operates. If you are unsure if your company needs such a contract, reach out to an insurance broker or surety company for guidance. Their team will evaluate and examine your circumstances to determine the best steps for you moving forward.
Several benefits can be gained by obtaining it. These can include:
- Protection from financial loss: If a project is incomplete as agreed upon, the bond will provide funding for the completion of the project. This can help to protect the company from financial loss.
- Improved access to financing: In some cases, the surety company may be willing to provide the funding for the project. This can be helpful if the company is having difficulty obtaining traditional financing.
- Peace of mind: Knowing that a surety program is in place gives the business firm comfort and lets them concentrate on other activities.
These are just some benefits that can be gained by obtaining it. In general, it helps to protect both the company and the project from any potential financial losses.