In construction projects, various kinds of bonds are required by project owners. These are called surety contracts, and they include bid bonds, performance bonds, and payment bonds. A surety contract, in general, is an agreement that a surety company or cosigner, guarantees the capability of the contractor to fulfill his stipulated obligations.
Surety Contract Versus Performance Bonds
Basically, any performance bond is a surety contract, as it falls under the umbrella of surety bonds. However, a performance bond is different from a bid bond and a payment bond. It fulfills a specific requirement, and that is to ensure that the contractor will complete the project he has signed on for. On the other hand, a bid bond is submitted to make sure the contractor signs up for the project at the rate he stated during the bidding process. A payment bond, on the other hand, is to prevent non-payment of materials and labor.
Importance of A Performance Bond
Issues during a construction of a building are not uncommon. Delays happen due to late supply deliveries, lack of manpower, weather disturbances, and even design changes. For each additional day the project is delayed, this means money for the owner, both because of more costs for construction and loss of income.
Worse, the contractor might end up being completely unable to finish the project, whether there is an irreparable conflict with the owner or even the contractor going bankrupt. In fact, the second scenario is not a rare event, with up to 14% of contractors actually going bankrupt.
The financial cost of these situations may be recovered if there is a performance bond and these are stipulated in the contract.
Possible Performance Bond Claims
Each performance bond can be different, depending on the terms and agreement between contractor and project owner. In general, there is a possibility for the owner to claim damages from the surety company if the contractor fails to fulfill his responsibilities, so long as the contract states so. However, there are some bonds that cover any damages incurred from whatever breach of contract.
For example, when the project is delayed, the right to claim damages is not as clear-cut. Performance bonds, if the construction contract is incorporated and that completion time is to be strictly adhered to, then the owner is able to get compensation for any delay.
Other claims may include legal fees but like delay damages, they cannot be automatically claimed unless parties have included it in the contract. For more information on claims, can learn more about this here.
Enforcement Of A Surety Contract
One of the most common claims under a performance bond is the contractor defaulting in the middle of the project. This prevents the project from being completed. In this case, the cosigner also has the following options.
First, they may decide to fund the contractor in order to complete the project. The second, on the other hand, is to search for a replacement that is acceptable to the project owner. A third option is to take over the project and finish it by hiring other replacements. Fourth, they may pay the contractor the penal amount agreed upon. Lastly, they may also do nothing and let the project owner find someone else to finish the job.
Beyond anything else, a surety contract is entered into to make sure that a project is seen all the way to completion, with assurances to the owner that the contractor they hire will be capable of doing so. Surety companies have the most to risk in such agreements, which is why they have to do their research on the contractor before providing them the performance bond.
Still, unfortunate circumstances might occur that cause delays or worse, the inability of the contractor to finish the project completely. In these cases, the performance bond, a type of surety contract, allows the project owner to recover some costs or damages they incurred.