Service Contractor Performance and Payment Bonds

Performance and Payment bonds are required by various types of owners for many different types projects, but they are legally required for all construction projects greater than $150,000 for public works projects.  However, many owners choose to require performance and payment bonds on a much broader spectrum to mitigate risk.   This includes requiring bonds for service contractors and commercial contacts that are not construction related ie janitorial service contracts, tree trimming, landscape maintenance, time and labor contracts, street sweeping, supply and delivery, among others.  As a commercial contractor that makes money working for public entities, it’s probably only a matter of time before a bond is required. In the surety world, we categorize this as ‘commercial contract.’ In this blog, we’ll discuss what you need to do, as a commercial business, to qualify for bonding as it relates to commercial contract.

Before we discuss the ins and outs of commercial contract, we need to define performance and payment bonds.

• Performance Bond – Guaranties to the owner (public entity or other) that the contractor (you) will perform and fulfill its obligations of the contract.
• Payment Bond – Guaranties to the owner that any 1st and 2nd tier subcontractors and suppliers are paid for work performed.

Understanding what the bonds actually guaranty makes it easier to understand how a surety company will underwrite the bond needs of a commercial or service contract.

Because a performance bond guaranties the obligations of the contract, reviewing the contract is critical.  The biggest obstacle to overcome is the term of the contract. Surety companies do not like multi-year contracts so being able to issue a performance bond on an annual basis, with cancellation provisions, is ideal.  For example, a janitorial service contractor may be awarded a nice contract for a 5 year term.  While that may be great for the contractor, it’s near impossible to bond a contract for that long – companies go out of business all the time and lot can change in 5 years.  Understanding this, a service contractor can influence changes to the proposal BEFORE the contract is awarded during the request for proposal period.

This blog just scratches the surface of bonding service contractors. Understanding how to qualify for bonding credit is equally important.  We can help.  Call us for a consultation at 877-737-5723.