Performance Bonds for Service Industries

A continuing trend for municipalities across the country is outsourcing of services. Everything from janitorial services, to equipment maintenance is being bid and awarded to outside firms.  As a means of pre-qualification as well as protecting the taxpayer, many of these newly outsourced services require bonding.  Requiring bid, performance and payment bonds on service contracts weeds out potential contractors that lack the experience, financial resources or manpower to manage a service contract.

Take a janitorial service contract for instance.  A municipality decides to outsource the work.  The issue a request for proposals or maybe competitively bid the contract.  What would prevent say a two person home cleaning company from bidding on what could be a complex and costly service contract? Attaching a bond requirement to the procurement process would reduce, if not eliminate the risk of an unqualified company getting the contract.  Why? Because the surety company will require financial information and detailed proof of previous, relevant experience before agreeing to provide surety bonds.

What is the cost of a performance bond for s service contract? There are many variables, but generally the cost would be 1% to 3% of the required bond amount. A small price to pay for the prequalification services provided by the surety and these services are backed by the substantial financial assets of the bonding company.