how to get a performance bond
in order to get a performance bond contractors need to apply to a surety for a letter of bondability this non binding letter states the monetary limits that the surety would be willing to provide to bond the contractor based on factors like the contractor s experience and creditworthiness and the size of the proposed project s the bondability letter also confirms that the surety is registered and licensed in the state where the work will be performed and provides contact information although this letter is not legally binding it is a useful way of demonstrating a contractor s qualifications before they have to spend any money in order to become fully bonded the contractor must provide certain financial information to the surety in order to underwrite the bond this will depend on the amount being bonded smaller projects might require only good credit and a clean license history while larger projects may require financial statements balance sheets and several years of tax returns the contractor will also pay the company to provide surety usually a small percentage of the bond amount example of a performance bondsuppose a hypothetical developer is looking for a contractor to construct a new apartment building because of the size of the project they will require their contractor to be bonded this provides the developer with protection if the contractor fails to meet the requirements of their contract the contractor will engage with a bond provider or surety to provide a performance bond for that project 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 if the contractor does fail to deliver the developer can file a claim with the surety for damages equal to their losses up to the value of the performance bond the surety then investigates to determine the extent of the losses industries that use performance bondsusually performance bonds are provided in the real estate industry these bonds are heavily used in real property construction and development they protect real property owners and investors from low quality work that may be caused by unfortunate events such as bankruptcy or insolvency of the contractor performance bonds are also useful in other industries the buyer of a commodity may ask a seller to provide a performance bond this protects the buyer from any risk that the seller is unable to deliver the commodity for any kind of reason if the commodity is not delivered the buyer receives compensation for losses and damages caused by the non completion of the transaction 