Solar Power Performance Bonds

What Are They?

A solar power performance bond is the solar industry’s equivalent of the performance bond, commonly required for contractors working on traditional construction projects. Performance bonds are most often required for commercial and industrial solar projects, not residential.

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A solar power performance bond is a solar contractor’s guarantee to complete the project in accordance with contractual requirements. If the contractor should default and not complete the work, or produce unacceptable results, the project owner (the bond’s “obligee”) can file a claim against the bond. They will be compensated for the cost of hiring another contractor to complete the project or remediate the construction flaws.

Any solar contractor can be required to purchase a solar power performance bond as a condition for being awarded a contract. As the obligee, the project owner establishes the required bond amount, which typically is at least equal to the total project cost.

There are three parties to the surety bond agreement for a solar power performance bond. In addition to the obligee, the two other parties are the solar contractor (the bond’s “principal”) and the company that authorizes the bond (the “surety”). The agreement spells out the terms that the principal must abide by to avoid a violation that could result in a claim against the bond. It also makes the principal solely responsible for paying any valid claim against the bond. But while the principal is legally obligated to pay valid claims, most often the surety will expedite matters by paying the claim initially and then being repaid by the principal.

In authorizing a solar power performance bond, the surety is agreeing to extend credit to the principal to cover the cost of a claim if the principal is unable to pay it immediately. That carries the risk of not being repaid by the principal and having to take legal action to secure repayment.

Consequently, the premium rate a given solar contractor will pay depends largely on how creditworthy the underwriters find the principal to be. The biggest factor is the principal’s personal credit score. With good credit, the principal should be eligible for a premium rate that’s in the range of 1-3% of the bond amount. The annual premium for a solar power performance bond is calculated by multiplying the required bond amount by that percentage.

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