Performance Bonds for Service Contracts Explained

When most business owners think of companies that need performance and payment bonds, they think construction. However, it’s becoming commonplace for janitorial, street sweeping, window washing, security guard, and other service contractors to be required to post bonds for public works.

When companies fail on a public project, without a bond the public entity has limited recourse, along with the defaulted companies’ employees and/or subcontractors. Like construction companies that default, it doesn’t happen often but when it does, the public agency, companies, and worst of all people, are financially damaged. A bond can protect all parties and more public agencies should consider it as a viable option to protect tax dollars its spending.

Service companies that work for public owners should look into bonding ahead of time, rather than when a specific RFP calls for a bond. While the product of the bond itself is the same, the underwriting is different.

A service company should be prepared for its bond agent to address contract issues stated in the RFP, in addition to the company financially qualifying for the bond. Two of the main issues include:

•  Contract term – This is often the most difficult hurdle to overcome as many service contracts are multi year. A performance bond is guarantying the entire contract, and surety companies do not want to be tied to a contract for more than 2 years, as a general rule of thumb. Some owners will accept an annual bond form, which helps address this issue.
• Renewal/Non Renewal clauses – For those service contracts with renewal options, some owners give the option to renew to the owner, principal (contractor), or surety. This scenario is the most ideal. Other owners want the sole discretion, which can make obtaining a bond problematic.

Many service contractors are not familiar with the bonding process, and are often not set up for bonding until faced with a fast approaching deadline. The best approach is get set up on a bond program AHEAD of time. It costs nothing and will save time, and headaches, when a bond is required. And it will be required, more and more.

Email contract@surety1.com and ask for a Service Contractor questionnaire to start the process.

Commercial Cleaning Licensing and Bonding Guide

Read our Commercial Cleaning Licensing and Bonding Guide to learn more about how to get bonded and insured as a cleaning company.