Terry and Kristen Stamman, co-owners of Twin Cities Siding Professionals, watched one home improvement company after another in Minneapolis and St. Paul close up shop. Some folded with contracts signed but no work performed. Some folded with jobs in progress. In either case, home-owners had little recourse.

This came to Terry's attention when prospects informed him that their budgets for a siding job were crimped due to having been left in the lurch by a previous contractor defaulting.So the Stammans decided to offer customers the option of taking out a performance bond on each job.

Rare in Residential

A performance bond, issued by an insurance company, is a financial instrument that guarantees the completion of a job by furnishing the funds to hire another contractor in the event the original contractor can't complete the work. Common in large commercial construction projects, performance bonds are rare in residential construction.

Typically the cost is anywhere from 2% to 3% of the job. Insurance companies, Pennsylvania broker Mark Kinsey says, require personal guarantees to back such bonds. Aside from a profit and loss statement, "they will ask for a list of all your personal assets and those of any other owners of the company." D.S. Berenson, of Johanson Berenson, a law firm with extensive experience representing home improvement companies, points out that in some states where contractors are licensed, a state-created guarantee fund will furnish those funds in the event a contractor goes out of business. But not all states require contractor licensing or registration, and even in some states that do there is no guarantee fund.

Bond Option

After initially securing a performance bond on a siding job that involved a large condo complex ? with the complex paying the cost of the bond ? the Stammans incorporated the performance bond option into their selling process and contracts, giving customers the option of including the bond cost in their contract.

Terry estimates that about 20% of clients agree to the 2% cost. In many cases, he says, they know people who have been left holding the bag "or they're very cognizant of the economy and know that companies are going out."

Terry discusses the company's performance bond toward the end of his presentation. "I tell [homeowners] that if we disappear, you're going to get your money back. It may look like a paltry sum to a commercial builder, but it's not to a homeowner."