Performance Bonds: A Guide for California Construction Companies
What is a Performance Bond?
A performance bond is a type of surety bond. It provides assurance that the construction company doing the work will fulfill their obligations per the terms and conditions of the contract Ultimately, this helps to ensure the work is done properly and protects the project owner against financial loss if the contractor is unable to perform.
A performance bond involves three parties:
- The Principal: The construction company doing the work and providing the bond.
- The Obligee: The owner of the project requiring the bond.
- The Surety: The company issuing the performance bond and providing the financial assurance.
When and Why Performance Bonds Are Required
In California, performance bonds are usually needed for two main types of projects: public works and private commercial development.
- Public Works: On state and local government projects, performance bonds are governed by the California Public Contract Code and the Little Miller Act. Every public works contract requires separate performance and payment bonds from a licensed surety company. These bonds typically need to cover 50% to 100% of the total contract price.
- Private Works: While not required by state law, private developers and lenders often ask for performance bonds as a contract requirement to manage their risk and secure project funding.
Performance Bonds vs. Construction Liability Insurance
It is easy to confuse performance bonds with general liability insurance. While both are often handled by insurance companies, how they work and how they are approved are very different.
| Feature | Construction Performance Bonds | Construction Liability Insurance |
|---|---|---|
| Parties Involved | Three (Principal, Surety, Obligee) | Two (Insurer and Insured) |
| Who Benefits | The Obligee (Project Owner / Government) | The Insured (The Construction Company) |
| Approval Approach | Approved with the expectation of zero losses | Approved anticipating regular claims |
| Indemnity | Construction company must reimburse the surety for any money paid out on a claim | Insurer absorbs the loss beyond the deductible |
How Much Does a California Performance Bond Cost?
The cost of a construction performance bond depends on your construction company’s financial health and experience. When a performance bond is required, it is usually issued alongside a payment bond, giving you a single combined price that covers both.
- For established construction companies with strong financials and a solid track record, premium rates generally range from 0.5% to 2.0% of the total contract value.
- For newer companies or those with credit challenges, premiums can be as much as 3.0%.
For a detailed breakdown of performance bond costs and our free calculator, see our complete guide to performance bond costs in California.
How to Apply for a Performance Bond
To obtain a performance bond, surety agencies will review your experience and financial strength. The requirements will depend on the size of the performance bonds you need and the total amount of bonds you will have outstanding at any one time:
- Bonds less than $3 million: These can often be obtained with a simple one or two-page application based on personal credit of the owners of the company and past experience of completing similar size jobs.
- Bonds over $3 million: When getting into higher levels of bonding, engaging a construction-oriented CPA may be required. These provide a higher level of credibility to the surety company along with reports that allow them to track job performance.
In addition to the financial requirements above, past experience of profitably completing similar size and type projects is important to surety companies, as past results are usually an indicator of future success. To understand the 4 most important factors sureties look for when bonding larger jobs, read our article.
The General Indemnity Agreement (GIA)
Getting a performance bond requires signing a General Indemnity Agreement (GIA). This is a legal document where the construction company and shareholders agree, among other things, to reimburse the surety for any losses or expenses from a bond claim. The GIA usually requires signatures from the corporate officers, shareholders, and their spouses. In California, spousal indemnity is needed because of community property laws, ensuring the surety has legal access to jointly held assets if the company defaults.
Bond Premium Calculator
Use our free calculator to estimate your performance and payment bond premiums.
Where to Get a Performance Bonds
Where a contractor gets their performance bonds can be one of the most important decisions they make. There are many providers of construction performance bonds, but they vary greatly in their expertise and ability to help contractors achieve their goals both for bonding capacity and business growth:
An Insurance Agent
Insurance agents may seem like a good choice to seek out a performance bond, especially if you have an agent that you’ve worked with previously, but it’s important to remember that they aren’t surety experts. They don’t have the expertise or experience with California surety bonds to make for a smoother bonding process, and because they don’t handle bonds exclusively, they don’t have the same quality relationships and access to surety companies. Due to the lack of these industry connections, they likely don’t have the resources to create opportunities or understand enough about sureties to match a contractor with the right surety provider.
A Surety Specialist
A surety agent is an expert solely dedicated to surety bonds. They can apply their professional knowledge to create a much smoother bonding process, knowing the road ahead no matter what stage you are at in business. Since surety agents only handle surety bonds, they have industry connections and often have access to special programs that others don’t. They also form quality relationships with surety companies, better equipping them to match the right surety company with your needs. Their expertise goes beyond a single transaction; they know how to provide guidance on how to increase bonding capacity, qualify for larger performance bonds, and grow your business.
Not only are we The Construction Bond Specialists at CSBA, we have internal underwriters on our team to work directly with you to guide you through the bonding process and help you build your business.
Performance Bonds FAQ
What is the difference between a performance and a payment bond?
The performance bond ensures you will complete the job according to the contract terms. The payment bond ensures that your subcontractors, vendors, and laborers get paid. They are typically issued together as one bond package but they serve different purposes and protect different groups.
When can you release a performance bond?
A performance bond is released once all the contract obligations have been fulfilled.
What does a performance bond cover?
The performance bond covers the owner of the project against financial losses if the contractor fails to deliver on the project within the contractual provisions.
How long does a performance bond last?
Since performance bonds guarantee the completion of the contract, they last until the project is finished along with any required warranty period included in the agreement.
What happens if a performance bond is called due to default?
If the project owner formally declares a default, the surety steps in to investigate and resolve the issue. If the surety pays out on a bond claim, the contractor will be obligated to reimburse the surety company.
Get a Performance Bond Quote
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