Performance bonds, a specific type of surety bond, guarantee that a contractor will complete the work by the terms of a contract.
It is usually required for public works projects and can be issued by a bank or surety company. If a contractor fails to meet the terms of the bond, the project owner can claim against the bond for compensation.
What is a Performance Bond?
Contractors will use a performance bond, a type of surety bond, to guarantee that they will successfully complete a construction project. A project owner generally requires this bond before a contractor begins work on the project, and it can also be referred to as a contract bond.
A performance bond entitles the owner of the project to monetary compensation in case the contractor fails to meet their obligations under the contract. This compensation is often based on the amount of money paid as a percentage of the project’s total cost.
Performance bonds can be used for both private and public projects. They are typically issued by the same surety company as payment bonds and are usually combined with them under one single coverage. A payment and performance bond is generally given in tandem on public and private projects, mainly those funded by the federal government or a state. A payment bond ensures that a party will pay all parties, including subcontractors, suppliers, and laborers, when the project is finished. A performance bond guarantees a project’s successful completion. Combining these two gives workers the right incentives to provide the client with a high-quality finish.
What is a Surety Company?
Surety companies help businesses secure bonds for a variety of purposes. These include completing government contracts, covering losses incurred in court cases and ensuring that employees are honest.
A surety bond is a three-party, legally-binding agreement between the principal, obligee, and surety company. The bond is a line of credit that acts as a financial guarantee to the obligee.
The obligee may claim against the bond if the principal fails to comply with the bond terms. The surety company investigates the claim, determines whether it is valid and pays any losses resulting from the lawsuit.
When choosing a surety bond provider, it’s essential to look for reputable ones licensed in your state. You’ll also want to ensure they offer the types of bonds you need. Getting a quote is the first step toward comparing costs and deciding which company is right for you. A quick online search will bring up dozens of companies, so do your research.
What is a Contract?
A written agreement between two or more parties that specifies specific legal obligations is known as a contract. When one party fails to fulfill those obligations, the other may sue them for monetary damages.
A contract must have genuine consent from all parties involved to be valid. The agreement’s terms must be accepted by all parties, and each must be able to comprehend them and carry them out.
In addition, the contract must be enforceable by law. This can be achieved through state statutory and common (judge-made) law and private law, which governs the agreement between the parties exchanging promises.
A contract can be made in writing, orally or through action. A warranty can also be void due to duress, mistake, or fraud.
What is a Contract Bond?
A contract bond is a legal document between the obligee (the project owner), principal (contractor), and surety that guarantees performance and payment. The obligee can then claim against the surety for any financial losses they incur due to the contractor’s failure to complete the project.
A contract bond can also protect a second party, such as the property owner, from low-quality work. The contract stipulations that the bond binds the contractor can be anything from quality standards to time constraints.
Construction contractors are often required to have a contract bond when working on government projects. These bonds, called performance and payment bonds, are necessary for federal contracts over $100,000. State governments may have similar requirements for state and municipal jobs.