How Long Does a Performance Bond Last?

performance bond - Do performance bonds expire - abstract

Do performance bonds expire?

A performance bond is a promise by a contractor to complete the work in accordance with the contract terms, and in return, the owner agrees to pay for work completed. 

Performance bonds typically expire within 90 days of the job being completed. If there are no claims filed against it during that time frame, then you must have successfully held up your end of the bargain.

On occasion, owners ask that they want their contractors to extend their bonds past that limit. The purpose is usually so that if claims are filed after you’ve moved on from the project but before the bond expires, it will still be valid when/if you have to go back and defend them.

This request doesn’t come without risk for both parties though. For example: what if the contractor leaves town or goes out of business before the bond expires? If done incorrectly, both parties could potentially lose.

How long do performance bonds last?

Performance bonds are typically required by construction or engineering companies or other businesses that contract with public agencies or government entities. They ensure the project is complete, on time, and within budget. The financial penalty for the contractor’s failure to perform increases as time goes on since it is often tied to a percentage of the value of work done so far.

A performance bond must be issued before any work begins according to specifications set out in a formal “Request for Proposals” process where all interested parties are invited to submit bids for the work. 

Since these requests can be lengthy, they have deadlines that typically require responses within 30 days or less to prevent applicants from being disadvantaged by delays that benefit their competitors. Issuing an RFP and the underlying bid process can amount to several hundred man-hours by city staff and any company that wants to participate in the competitive bidding process must be prepared to invest at least that much time.

What is the duration of a performance bond?

A performance bond is usually required for construction projects. A performance bond guarantees that the agreed-upon work will be completed by a certain date or it will pay penalties, which are described in the contract. The contract may require monthly installments of 150% of the value of each month’s contracted work, however, if payment falls more than 10 days behind the contractor must pay interest on all monies due at an annual rate of 18%.

The duration of a performance bond is equal to the number of months remaining before completion as set out in the contract plus one month for each $100,000 in value under the contract. For example, if there are six months remaining before completion and work has been valued at $500,000 then 27 months (6+6) x $100,000 = $2,700,000 x 1 month. This would equal $31,400 as the performance bond amount required.

Do performance bonds have to be renewed?

Let’s start with a brief explanation of what performance bonds are and how they work. A performance bond ensures that a contractor will be able to take on the execution of an agreed contract without risk for its own capital outlay. 

The amount of bond is determined by the project budget or unit rate cost plus a percentage buffer which represents a reasonable estimate of possible claims against ‘delay damages’ plus a share of ‘advance payments’ followed by deductions for retention money at completion. In other words, it gives you protection against ‘cost overruns’.

If there were no requirement to renew performance bonds, contractors would simply continue to use their bonds until they expire as their projects come to completion. However, there is a legal requirement for performance bonds to be renewed. 

Even though there are only certain events that will trigger the need for renewal, these are often not clearly defined and may cause confusion amongst contractors, especially where there is no communication on this matter during contract negotiations or when applying for permits. When speaking to clients on this subject they seem equally confused as to when they need to renew their performance bonds.

How long are performance bond contracts?

Performance bonds (also known as bid bonds, contract bonds, and advance payment bonds) are posted by a contractor upon bidding on a public construction project. Since the owner of the project may not receive any bids from responsible bidders, it will not award a contract to an unqualified bidder. 

A performance bond guarantees that should the winning bidder fail to complete the work as agreed in the contract documents, he will pay for all costs incurred by the owner to complete or cure such failure and reinstate his work.

A performance bond is only valid for one year from the date of the award. After that time it is no longer valid and can not be used to pay for any damages caused by a contractor’s failure to complete the project. 

The purpose of having this provision in your contract documents is so that if a contractor fails or refuses to construct the work for which he was awarded the contract, then another qualified contractor can be selected who is willing to do it at a reasonable price.

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