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Construction Performance Bonds

Construction Performance Bonds

Construction Performance Bonds guarantee the owner (obligee) of a project that a contractor (principal) will complete a project according to the contract. The purpose of a Performance Bond is to provide a guarantee that a project will be completed by the contractor. If the principal fails to complete the project or does not complete it to the specifications set forth in the contract, the obligee will be covered by the Performance Bond and experience no financial loss.

If the principal defaults, or is terminated for default by the owner, the owner may call upon the surety to complete the contract. Many performance bonds give the surety three choices:
1. Completing the contract through a completion contractor (taking over the contract).
2. Select a new contractor to contract directly with the owner.
3. Allow the owner to complete the work with the surety paying the costs.

The penal sum of the performance bond usually is the amount of the prime construction contract, and often is increased when change orders are issued. The penal sum in the bond usually is the upward limit of liability on a performance bond. However, if the surety chooses to complete the work itself through a completing contractor to take up the contract then the penal sum in the bond may not be the limit of its liability. The surety may take the same risk as a principal in performing the contract.

It is mandated by the government that all public projects are secured with a Performance Bond. If a project exceeds $100,000 Federal law requires a Performance Bond. Many projects in the private sector also require Construction Performance Bonds.

For more information regarding Construction Performance Bonds, please call us at 866.376.2510 today.