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Reviewing and Complying with Performance Bonds

As we continue to deal with the economic effects of the COVID-19 pandemic, it’s critical for the construction industry to take proactive steps to safeguard their existing and future building projects.

Performance bonds are designed to serve as an assurance that the work will be performed in accordance with the terms of the applicable construction contract. In most cases, the general contractor is required to obtain a performance bond by the project’s owner as assurance and protection against the general contractor’s default under the initial contract.

A general contractor may also require its subcontractors to obtain performance bonds, which is typical on larger-scope projects. In the construction industry, there are three parties involved in a performance bond: the obligee, the principal, and the surety.

Types of Construction Bonds

On government projects, performance bonds are nearly always linked with payment bonds and bid bonds. The three bond types work together to ensure every component of the project is completed as per the agreement in the original contract. While a bid bond is often needed to bid on the project, the performance bond is required once the bid is won and the payment bond is often required to ensure that all participating parties are paid in full and on time while the project is underway.

Feel free to contact The Surety Place for more information about each of these bonds and also learn about the different surety bond programs we offer.

Payment bonds differ from performance bonds in that they are designed to safeguard subcontractors and vendors from nonpayment by the general contractor. 

A performance bond, while designed to guarantee contract performance in line with contract conditions, can be deemed worthless and ineffective if the principal fails to meet any of the bond’s criteria. As a result, it is important for construction project owners and general contractors to understand the performance bond requirements to ensure the project is completed in accordance with the original project scope. Make sure you obtain the right bonds for your upcoming construction projects by contacting Surety Place at, where we have underwriting authority to issue bonds in all fifty states.

What You Need to Know About Performance Bonds

Performance bonds are regarded and understood in the same way as contracts are, and they can be breached and enforced in the same way. If a contractor defaults, the bond’s conditions will specify any measures that the principal must do before the surety is obligated to rectify the contractor’s default. In addition, the bond’s conditions specify the surety’s responsibilities and the actions it may take.

If a claim is made against the performance bond, the surety’s obligations to rectify the issues come into play. The Surety will take one of the following actions:

  1. With the consent of the Obligee, the surety can arrange to have the original contractor rectify the issues
  2. Get bids and negotiate proposals from other qualified contractors to complete the contracted work
  3. Agree to pay the obligee the costs it incurs to complete rather than finding a contractor to complete the job
  4. Deny the claim and show proof as to why the claim was denied

When a claim is made against a bond, all 3 parties are involved. The obligee has to file the correct paperwork against the bond, showing proof of default, while the surety has to investigate the claim in its entirety before it can come to a conclusion about whether or not the claim is valid. If the claim is deemed valid, the principal can either complete the contract as originally agreed to or the surety can pay out the claim and the principal is then responsible for repayment to the surety agency. The best way to keep both business and surety bond reputations good and respected is to follow through with all contracts, on time, while making sure every appropriate party is paid in full.

Performance Bonds

For the most part, the surety agency does little to nothing in regard to the actual project. When a claim is made and the surety in notified of the claim, it is entitled to early notice and a chance to rectify the issue. If the bond specifies the number of alternatives for the surety to remedy the contractor’s default, the surety has the right to use all of them.

The obligee should be aware of the surety’s rights under the bond and should avoid interfering with those rights if they want the bond claim to be handled efficiently and with a nonbias. 

As a result, it’s a good idea to properly check any performance bonds that contractors have provided for your projects as a precaution. The performance bond should be properly reviewed both at the start of the project by all parties.

It’s especially crucial to go over your project’s performance bond if you’re thinking of terminating your contract with the contractor and looking for replacements. The performance bond may require the owner to notify the contractor and surety prior to default, or it may demand timely notification of default and the owner’s choice to terminate the contract.

As the owner of the project has full authority to fire the contractor, the performance bond can inhibit certain actions. While the owner may want to get the contractor’s default remedied quickly, doing so without first reading the performance bond might result in a significant breach of the bond. As a result, before taking corrective action, you must examine your performance bond.

To summarize, performance bonds are a wonderful method for owners and higher-tier contractors to safeguard their expectations that individuals they hire will complete their work according to the contract’s specifications, especially in these difficult economic times. As a result, properly reviewing performance bonds and complying with any restrictions in the bond is a worthy undertaking to guarantee you are able to enforce them. 

The Surety Place is the best surety bond agency in the nation for performance bonds, payment bonds, and bid bonds. We work in all 50 states which means we can not only get you bonded but also at the greatest price.

January 15th, 2022