A performance bond in the construction industry provides a guarantee that if a contractor fails to perform, the project will be completed without additional cost to the client. A bid bond guarantees that the winning bidder will undertake the contract under the terms at which they bid.

Remodeler Rob Hurdle is familiar with both terms because his company, Projects Unlimited, in Warrenton, Va., builds commercial projects that require bonding.

“It creates the perfect scenario,” Hurdle says. “The contract is a handshake in words. Bonding takes it one step further. You’re putting up money for your word.”

Hurdle is trying to increase his bond rating for projects from $250,000 to $1 million so that his company can pursue even larger commercial jobs.

As part of the prequalifying process, bonding companies scrutinize a remodeler’s financial records, credit, and processes, and there can be serious repercussions for not completing a project. “Your credit rating may take a dive, and you may have a hard time starting another company,” Hurdle says.

Because government agencies use public money, they are required to have bid and performance bonds for projects, Hurdle says. Some nonprofit organizations also require bonding because they use government grants or subsidies.

Bond premiums vary, but the cost for a performance bond is generally 1% to 3% of the contract price of the job.

Hurdle thinks that if the residential segment of the industry required bonds, it would prevent a lot of problems. However, many insurance companies do not bond residential projects, and many homeowners are not willing to include any portion of this premium in their contracts.

“If [homeowners] were willing to accept the additional cost, there would be less shenanigans and better contractors,” Hurdle says.