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What are performance bonds?

A performance bond is issued between a contractor and a client (sometimes referred to as an obligee), and usually there’s an insurance company or a bank acting as a mediator. The point of the performance bond is to make sure the contractor fulfills a job that was requested by an obligee. So, for example, say you want to build a house and you find a person willing to do that job for you.

How Do Performance Bonds Work?

Let’s follow the mentioned example, and let’s say the house you want to build is worth $100,000. In most cases, here the contractor would reach out to an insurance company. Then, depending on these three factors: · Bond type So a performance bond in this case.

How Much Do Performance Bonds Cost?

It depends on the final factor mentioned before – contractor’s risk. If the contractor is a well-known and widely respected constructor that already had deals with the same insurance company, they know that they won’t have to pay the refund, since he’s not likely to disrespect his part of the agreement.

Are Performance Bonds Really Necessary?

This mostly depends on what type of work you want done. For construction work, such as the example that we followed until now, it’s almost always necessary. If you’re dealing with other areas of work, or you’ve found a contractor that you personally know (a friend of yours, for example) and you’re sure he’ll fulfil his part of the agreement, you might want to bypass the performance bond process.