Common in the construction and real estate industries, performance insurance bonds provide security to parties in the event that a project fails to reach completion. Following a bid process, the successful contractor will typically provide their client with a performance insurance bond. If the contractors fail to successfully complete the project, perhaps due to bankruptcy or a loss of workforce, the client can obtain compensation up to the value of the insurance bond.
For businesses operating within the construction industry, performance insurance bonds are commonplace, but this doesn’t mean you should simply accept the first insurance bond you can find. As a regular business cost, you’ll want to ensure that you find cost-effective bond providers.
Reducing the cost of performance insurance bonds
Usually offered by insurance companies or financial institutions, the cost of a performance bond is generally determined by three broad factors; the bond amount, the bond type and the applicant’s level of risk.
A performance insurance bond with a value of £1 million will cost more than an insurance bond with a value of £100,000, for example. This is simply because the insurer will have to pay out more if a £1 million bond is called in than they would if a £100,000 bond was called in.
If applicants have a history of their bonds being called in, this will also increase the cost of obtaining performance insurance bonds in the future. Firms with a poor track record and a high number of failed projects may need to pay more to obtain subsequent performance insurance bonds, for example.
Although bond providers take the applicant’s level of risk, the type of bond and the value of the bond into account when setting a price for the surety, there are ways of minimising the cost of performance insurance bonds. With some savvy money saving methods, businesses can successfully reduce the cost of their performance insurance and minimise their outgoings.
Finding the right bond provider
Once you’ve successfully obtained a performance insurance bond, it can be easy to stick with the same provider. However, this won’t necessarily get you the best deal, and you could end up spending more than you need to. When you’re looking for a new performance insurance bond, it’s always advisable to compare providers to see who is offering the best rates.
Another effective way of reducing the cost of insurance bonds is to reduce your level of risk as an applicant. Whilst a successful business track record will help to reassure bond providers and underwriters that you don’t pose a high level of risk, you’ll need to give your insurer a clear picture of your history, along with documentary evidence.
Before applying for performance insurance bonds, it may be helpful to collate your evidence, so that you can show how many projects you have completed in full, and what percentage of your previous performance insurance bonds have been called with.
With a range of surety providers offering performance insurance bonds, constructions firms can successfully reduce the cost of obtaining insurance bonds, whilst still providing clients with a guarantee against their work.Here at Construction Insurance let us help you through the process.