What You Should Know About Construction Performance Bond

Suppose an individual or company has a massive project and wants to ensure that it’s completed in a reasonable time with the best output. To that end, they’ve found the right contractor who promises to deliver the desired results. However, a mere guarantee or assurance is not enough for such a vast undertaking. Suppose the contractor doesn’t deliver on their promises or meet certain obligations specified in the contract? To ensure that none of that happens, it is recommended to find a bonded contractor with a construction performance bond. Why is it necessary? Read on to find out.

What is a Performance Bond?

You must have gotten some idea about a performance bond from the above information. In the simplest terms, it is a financial instrument that ensures the successful completion of a massive project. A contract bond usually involves three parties: principal, obligee, and surety.

Principal

The principal is the party entrusted with carrying out a job. They could be a contractor or firm and will often be asked by the obligee (or the project owner) to provide the performance bond before starting work on the project.

Surety

Surety refers to the party that guarantees the contractor will complete the work efficiently and on time and according to the contract, and it is the surety company that provides the performance bond.

Obligee

The obligee is the project owner, and it could be a company, individual, or even the city. If a default or the contractor does not meet their obligations, they will receive a compensatory amount.

What is a Payment  Bond?

Although several people are unaware of it, a performance bond is often accompanied by a payment bond. It is an agreement between the obligee, principal, and surety to ensure that the subcontractors, laborers, and suppliers of essential materials involved in a project are fully paid.

Are These Bonds Always Required?

Usually, major public and private construction projects that extend to a few months, at the very least, will hire a contractor with a bond. Service-based contractors, including landscape, snow removal, tree cutting, and janitorial, also require them besides construction contractors.

What are their Benefits?

A performance bond has several benefits, the most obvious one of which is security. However, the advantages extend to both the principal and the obligee.

Benefits to the Obligee

The bond will assure the obligee or the project’s owner of the work being completed on time without incurring any additional costs. If any obligations are not met on time or damages occur during the construction, they can claim fair compensation. They also provide the owner protection against circumstances where the contractor is insolvent or declares bankruptcy, thereby stalling the completion of the project.

Benefits to the Principal

A contract bond is also beneficial to the principal, or the contractor entrusted with the project’s completion. They would not land good public and private projects without these bonds since it establishes their reliability and credibility. It also gives them a competitive advantage since businesses are likely to hire those with these documents.

A Performance Bond is not Quick Cash

It is essential to know that a performance bond is not a means to get quick money or cash on demand. Under certain circumstances, the project’s owner is entitled to compensation, but those must be established first. It is also not a problem solver or meant to settle disputes between the obligee and the principal. These bonds do not cover and include performance disputes of any kind.

Difference Between a Surety Bond and Insurance

A surety bond differs from insurance because compensation is paid to the company if there is any damage or incident in an insurance policy. As opposed to that, a surety bond will pay the obligee any claim made but will look to the contractor to recover the losses.

A construction performance bond is essential for the principal because it is a valid proof of reliability and the obligee as it offers them financial protection. It protects them from damages or unforeseen circumstances that may prevent the completion of a project.

Adam Hansen