What Is A Subcontractor Performance Bond?

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What is a subcontractor performance bond? 

Most subcontractors need a performance bond to show that they will complete the work that is outlined in their contract. Contractors must include project specifics on their contracts and on any addenda, including the materials to be used. 

Subcontractor’s bonds must be “adequate and effective,” meaning they should provide the owner with an amount of money sufficient to cover potential losses and expenses due to incomplete or shoddy workmanship provided by the subcontractor. If this isn’t covered in the specifications of their contractor’s bond, owners may require additional coverage for issues such as: 

Most bar bonding companies offer subcontractor performance bonds that meet industry guidelines. Bonds are usually based on a percentage of the overall contract price or estimated cost of materials. Owners should review their contracts carefully to determine the bonding requirement of the contractor. Performance bonds are not always required for all subcontractors, but some projects or trades may require a bond as a form of insurance.

Do subcontractors need performance bonds? 

As a general rule, it is not necessary for a subcontractor to provide a performance bond. They are usually required by the contractor who has been awarded the contract and whose project will be affected if the subcontractor fails to perform their obligations under the agreement.

In many cases, major contractors award contracts on which they have obtained insurance from specialist construction insurance providers such as those who insist that all of their clients take out ‘all risks’ insurance so that in effect if anything goes wrong with their work, there’s no risk of any additional costs being added to the original quotation. However, this still leaves them faced with having to oversee an unknown quantity when it comes to overseeing a subcontractor’s work. This remains their biggest risk.

While it is possible to obtain performance bonds for subcontractors, they are usually only required if the work being carried out by the subcontractor exceeds a certain value or timeframe or where critical work has to be completed within specific timeframes.

What does a construction performance bond cover?

A performance bond covers the cost of labor and materials, so the contractor doesn’t walk away with your money. The contract amount includes the labor costs for all workers working on the project at any given time. Material suppliers are paid by cheque or direct deposit during the course of work if they request it. 

Contractors subscribe to their own bonds at an insurance company. This ensures that there is no risk to your project whatsoever because you get 100% back if something goes wrong! No matter what percentage of completion your project has reached, whether it’s 90% or 1%, you get 100% back. As long as the contractors get their money, you get your money.

What does a subcontractor bond do?

A subcontractor bond or a construction trust fund protects the rights and interests of suppliers and subcontractors. It encourages quality workmanship by making sure there is money available to pay for work performed.

The bond works in this way: The contractor agrees that if he does not pay the subcontractor who worked on the project, then his bonding company will cover all of their losses. And since most projects are never completed at one time, the subcontractor knows his payments will come from one source. This means it’s just a matter of keeping track of what has been done and waiting for payment.

What happens when a contractor doesn’t have enough money to cover all their expenses because they didn’t receive payment from the job? In other words, what happens when the contractor goes out of business? In these cases, a bonding company will cover for what was not paid. They’ll then go after the contractor for it once they find him.  

In addition to protecting subcontractors and suppliers from contractors going out of business, bonds also protect homeowners by requiring that contractors have enough money on hand to get started with the building.

What is required to get a performance bond?

A performance bond is an agreement between the owner of a project and the contractor who wins the contract. It ensures that, if it becomes necessary for some reason, such as bankruptcy or withdrawal from the project by the contractor, another bidder will be able to take over, finish and deliver on time at no additional cost to you. 

The contractor pays for this insurance.  The amount of money in your bond will vary depending on what you are building and where it’s located. You’ll need one surety (insurance) company to underwrite your project every step of the way. Getting bonded may be more expensive than your down payment, but it is protection for you and your project.

The owner will need to know the contractor’s financial strength or have a performance bond that will cover 100% of the cost of the project. The surety company may want all subcontractors, architects, engineers, and material suppliers bonded as well if they are required on their contract before issuing a construction performance bond.

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