Humans were always fascinated with building something, it is in our nature to build something. We started out pretty small with some primitive tools and primitive huts. But oddly enough, we mastered the craft of construction pretty fast to the point we don’t understand how our ancestors did it. We are still perplexed about how the ancient Egyptians made the Pyramids and the insane logistics behind such massive objects.
The way that Romans, the Inkas, and the Chinese built structures that still last to this very day. Construction projects continue being big endeavors that always rile up the crowds and represent hype. With new tools and new technology, we can build much more, but we also face new challenges. Growing your construction business takes time, and it is important to understand the basics. Here is how using performance bonds for construction can help grow your construction business.
Performance bonds
Performance bonds for construction are essential in the construction industry now and you need to understand them properly. If you read this article, you will see that figuring out performance bonds takes only a few minutes. In the shortest terms, a performance bond protects the obligee against the non-performance of the obligator.
Now, what does this mean for construction projects? This means that you, the obligee, who paid for the services of the obligator, is safe from the obligator bailing. Unfortunately, there are way too many instances of last-minute rug pulls in the construction industry. However, when these projects are regulated the right way, you can minimize these chances or ensure that everything continues to run smoothly even in a worst-case scenario.
The need for performance bonds
It would be very nice if we could live in a world where we could trust everyone’s word at face value. However, we all know that this is impossible and that we need other forms of guarantee for some things. Especially in business, we need something that guarantees that deals go through and what happens in other scenarios.
If the obligator does not conform to the agreed terms, there are two possible scenarios. First, the obligee gets their money back, which is a rare scenario. The second one is more common, where the surety, the third party behind the contract, finds a new company to do the job. If everything goes just as planned, then no one is hurt and everyone is happy.
The current state of the construction industry
The construction industry is dependent on a lot of factors, and that is an understatement. For a big project to go down properly, you need to rely on a lot of different players and their timely cooperation. Unfortunately, you are bound to encounter a lot of events that will try to jam up your construction plans. There are always some variables you will never be able to control, especially in construction.
In order to make sure that every party will be doing its part, you want them to sign a performance bond. That is always a sign of goodwill that every major and reputable company will always encourage you to do. If a company is reluctant to sign this type of deal, that means they are hiding something from you. This is a good litmus test to see if you can trust a company or not to follow up with your plans.
Understanding growth
Performance bonds for construction help to grow your business by minimizing the chances of making a mistake. In the construction business, there are no KOs like in boxing. You do not win by making the biggest house or making the biggest server room. In the construction business, you win by showing that you are a reputable business that does not make any mistakes.
When you agree to a performance bond, you, as the contractor, pay somewhere between 1 and 5% of the total costs. The surety needs to earn money somehow and they earn the money from these fees. If everything goes right, they keep this small percentage and you have a completed project. In order to grow as a construction business, you need to invest money, money does not come out of nowhere in this industry.
Why is it so complicated?
Asking this question is spot on and it is weird why we need to rely so much on contracts for something to get done. However, the reason why we depend on private contracts is that this part of the business is not regulated by the state. In most other countries, the state plays a big role in making sure that everyone plays fair in construction projects. It is unfortunate that unless parties are held accountable by higher powers, they tend to turn to chaos and greed.
Everyone wins
As stated before, every construction project is a cooperative process, meaning every player is important. If one fails to deliver, that means that the whole project could crumble and you will not be the only one at a loss. If you do not pay for a performance bond, maybe some other investors or companies will pull out of the project.
For a construction project to be a win-win situation for everyone, everyone needs to be on top of their game. A performance bond will help to ensure that everyone involved in the project can continue working and continue profiting. A performance bond is there to ensure that if a cog in this machine fails, it can replace it as soon as possible.
FAQ
Q: How do you collect the value of performance bonds?
A: If you opt for the situation to get monetary compensation for incomplete work, collecting a performance bond’s value is simple. You will need to contact your brokerage or a bank and they will transfer you the money. In order for this to run smoothly, you will need to prepare a lot of documents to prove that you can get the money.
In these situations, you will need to distinguish performance bonds from bid bonds and payment bonds. How much money you will take from the performance bond will depend on a few examples. For example, if your employees rely on your money, you will need to take the money to pay them.
Q: How much do performance bonds cost?
A: As stated earlier, a performance bond can cost somewhere between 1 and 5% of the total project’s cost. This does not seem a lot when looked at percentage-wise, but when you do the math, it is different. This does not mean that performance bonds are not worth it, it just means you need to think about all the costs correctly.
In order to estimate the costs, you need to take some factors into consideration that can raise or lower the costs. The main factors include the creditworthiness of the contractor, the size of the project, and the financial strength of the bonding party. The safer the projects and with fewer variables, the lesser the cost of the performance bond.
Q: How long does a performance bond last?
A: Nothing is forever in this world, and neither are performance bonds for construction. Performance bonds usually last a year, or you can make an agreement for them to last two or three years. There are also options for renewing a performance bond, but that comes at a cost. You need to think about these dates if you want your performance bond to truly have an impact on your project.
You are the one who needs to make a calculated decision on how long the performance bond should last. You can prolong the performance bond’s duration at a reduced rate, but again, it will cost you. In order to make this a valuable investment, you need to think realistically about the duration of the project and do not make underestimated decisions.
Q: How does it compare to other bonds?
A: It is important not to mistake these bonds for financial bonds, even though they share the same name. Performance bonds for construction are closer to being a form of insurance rather than an investment or a stake in the company. The reason why they have bond in their name is that they bond the obligee and the obligator to ensure cooperation.
On the other hand, you should distinguish them from payment bonds and what they represent. Payment bonds are there to ensure compensation to material suppliers and other subcontractors. Letters of credit are also different because they are there to ensure that the contract does not default.
Running a construction business is not an easy job to do, but the satisfaction of a finished project makes it worth it. You can’t make something big and valuable if you do not invest time, money, and sweat into it. You will probably experience a lot of stress and lose a lot of sleeping hours before the project gets done. In those moments, it is important not to lose yourself and not lose your vision of the project.
Never put a construction project above life priorities. When the going gets tough, you need to be ready to brace yourself and do so in a healthy manner so you can the project can keep on going. You will not be able to do this if you are not ready to face a lot of challenges in growing your business. However, once you complete a project and see it standing for years to come, you will feel proud of yourself.
