What Does A Performance Bond Look For When Underwriting The Bond?

Think of this scenario – the bid was already won by a contractor with the lowest costing. What happens next?

Performance Bonds

Once the project owner decides to award the project to the lowest bidder, a performance bond is required to replace the bid bond. A performance bond is another type of surety that protects the project owner from the damages that will cost him if ever the contractor does not accomplish the project according to what is specified in the contract.

A performance bond is mostly issued by an insurance company or a third-party guarantor for which they will also be legally liable. When the contractor fails to fulfill the terms of the contract, the guarantor will be held liable for paying the damages up to the amount of the performance bond. However, the guarantor’s responsibilities are not limited to being held jointly and partly liable for the contractor’s mistakes. There are cases when guarantors can also act as the middleman between the contractor and the project owner.

Performance bonds are usually given together with payment bonds. The latter refers to the type of surety which guarantees the project owner that the materials and the labor will all be paid. If the contractor defaults, then the guarantor will be jointly and severally liable as with the performance bonds.

 

Underwriting Performance Bonds

The term ‘underwriting’ started when, quite literally, risk-takers signed their names under the amount of the risk they were taking plus the premium. In other words, those signatures were the approval that the risk-takers were willing to face an x amount of risk.

When it comes to performance bonds or any kind of surety, this changes slightly simply because underwriting no longer refers to signing a name under the amount of risk. Instead, the whole underwriting process includes evaluating risk, putting a number on that risk, and approving or disapproving that risk as something the guarantor will be facing.

The process of underwriting a performance bond starts when a bid bond of a contractor is accepted and is awarded the federal project (this can also be applicable for big private projects). As stated above, the next step is to issue a performance bond together with the payment bond. To get a performance bond, the contractor will have to pass an application form to the third-party guarantor. In return, the third-party guarantor starts the whole underwriting process.

 

What Underwriters Are Looking For

The underwriters’ goal is to know whether to accept or reject the value of the risk. Apart from following the guidelines given by the surety company, they also have to balance it by maintaining the company’s relationship with its contractors. This is often the case for insurance companies because agents have a quota to reach and underwriters have to decide whether to accept a big-shot client that poses a huge risk or not.

Of course, there are factors where risk is based on and this is what underwriters look for when they decide on awarding performance bonds.

 

  1. Capital – the most important factor of all is the capital. Needless to say, the amount of capital a contractor determines their capacity to fulfill a project based on the project owner’s needs.
  2. Capacity – aside from capital, capacity is determined by the history of the contractor. This also includes the previous biddings he has been part of and the value of the projects he has taken on. Of course, when the federal project is big, the contractor should at least have a background of fulfilling big projects.
  3. Character – It’s not all numbers and resources in identifying risk. Underwriters also look at the character of the contractor because this will affect the relationship of the guarantor with them.

There’s a whole lot more than meets the eye when it comes to the underwriting process and the factors that affect the value of the risk. However, with Swiftbonds, rest assured that they have the best underwriters that give fair amounts on risks.