There are various types of surety bonds created for different purposes. Perhaps the most common bond people are aware of are title bonds for a car. For contractors and businesses, there are more bonds to be aware of—such as a Texas performance bond.
A Texas performance bond is a type of surety bond that serves as a contract between three parties to guarantee that the contract will be followed. The three parties are the obligee (the entity or business that requires work to be done), the obligor (the party hired to perform work) and the surety, who provides the surety bond. This surety bond guarantees that the obligor will perform the work hired as stated by the contract. If they cannot complete the work, the surety will provide compensation to the oblige. Performance bonds thus serve to protect the obligee in case a contracted party does not or cannot complete a project.
Who Needs a Texas Performance Bond?
Performance bonds are most commonly used with contractors. Government entities or large businesses may require contractors to enter a surety bond in order to cover possible losses. Any contracted worker or business may be required to enter a performance bond, however. If the obligor within a performance bond is unable to complete the project as promised by the contract, the surety will either compensate the obligee for the loss or find another contractor to complete the project in the obligor’s place.
If you’re a contractor, keep in mind that you may at some point be required to enter a performance bond. If you cannot complete the contracted work, the surety will compensate the obligee and, in turn, seek compensation from you or your company.
Performance Bonds and the Miller Act
It is perfectly legal for companies to require contractors to enter a performance bond in Texas due to the Miller Act. The Miller Act works to protect parties involved in federal and state government jobs. Related jobs include general construction, transportation and reparation projects.
Part of the Miller Act is also designed to protect contractors and subcontractors. Governmental jobs with contracts over $25,000, for example, must enter a payment bond to guarantee payment to the contractor and some subcontractors.
Performance Bonds vs Payment Bonds
Performance bonds and payment bonds are similar but have large differences. While they both concern contractors, one bond covers subcontractors and suppliers and the other covers the obligee. Payment bonds guarantee that subcontractors and suppliers working on a project will be paid. Performance bonds, meanwhile, ensure that the obligee will be compensated if a contractor is unable to complete a project as dictated by a contract.
How Much Does a Texas Performance Bond Cost?
The cost of a performance bond in Texas depends on the amount of coverage required by the obligee and the size of the job. Large projects will need more coverage. This cost is calculated based on a percentage of the contract price. For example, a contract $800,000 or less typically costs 2% to 3% of that price. At 3% of $800,000, this bond would cost $24,000. On the other end, contracts over $1,500,000 typically cost anywhere between 1% to 3% of that number.
Performance bonds are typically paid for by the obligee once it becomes part of the contract.
Where Can You Get a Texas Performance Bond?
You can purchase a performance bond in Texas from a surety or insurance agency that offers surety bonds. No matter what side of a bond you are on, make sure you understand the limits and requirements of the surety bond.