How are performance bonds calculated?
What is a performance bond?
A performance bond is a type of guarantee for contracted work. If you’ve been asked by a client to provide a performance bond, you will need to apply for one with an insurance company.
The performance bond acts as financial ‘promise’ that you will fulfil your contractual obligations and deliver on time. If you fail, the insurance company will pay the amount agreed in the bond to the client. This will enable them to complete the project.
What information do I need to provide when applying for a bond?
This will vary depending on the insurance company and the type of project.
In general, you can expect to be asked for details about your current contracts and any work in progress you have.
You may also need to supply information about your financial circumstances, such as:
- bank statements
- your latest published accounts
- details of cash flow and financial resources.
If your assets do not exceed the value of the performance bond, it doesn’t mean you won’t be granted one. However, you may need to supply additional information, such as what other assets are available (i.e. personal assets or other linked businesses).
You will also need to provide information about the contract in question, including:
- the value of the project
- the time frame envisaged (i.e. when the project is due to complete)
- any other specific requirements of the client.
What happens next?
The insurance company will normally have access to a variety of bond providers, to whom they will apply on your behalf.
Based on the information you have provided they will let you know whether you’re eligible. If you are, they will provide a quote for the cost of the performance bond.
What is the cost and how is it calculated?
The cost of a performance bond is normally calculated as a percentage of the value of the contract, and with reference to the length of the period to be covered. For longer projects, there may be a slightly higher cost.
A typical performance bond is normally about 10% of the contract value, but this can vary. The exact amount will depend on the individual contract and factors that affect your credit rating.
