Performance Surety Bond
This article is all about a contract bond known as a performance bond. You will sometimes see this surety bond also referred to as a performance and payment bond. These bonds are typically used in the construction industry.
The most common type of a surety bond is the performance bond. It is used in nearly every construction scenario imagined. In federal jobs, a performance bond is required pursuant to the Miller Act. Most states have passed similar statutes known as little miller acts. These laws require a performance bond on all of these types of contracts for federal and other government work.
A Performance Bond is a Contract Bond
The reason it is called a contract bond is that the performance bond secures the performance of a Obligor per the terms of a contract. This agreement is the backbone of every performance bond. When the performance surety bond is written, the underwriter will first look to this contract to determine the risk of the engagement and then the underlying issues that may arise during the term of the bond.
Three Parties to a Bond
There are three parties to any surety bond. First, there is the surety. The surety is the person or company that is providing the guaranty on behalf of the Obligor. Most sureties are now divisions of large insurance companies. Still. an individual can be a surety (not on government jobs, though) and even another company can be a surety. Please note that a surety is not the same thing as a guarantor. A guarantor is someone who agrees to take care of it pursuant to another agreement. A surety is someone who is actually part of the tri-party agreement – making claims that much easier.
Who is the Obligor?
The Obligor is the person that the surety is guaranteeing. The Obligor, in a typical construction scenario, would be the general contractor. They are the one that entered into the contract with the project owner and they are the one that is agreeing to the terms of the underlying contract that makes up the agreement that will be reviewed upon the issuance of the surety bond.
Who is the Obligee?
The Obligee is the project owner. They are the one that gets the benefit of the performance and payment bonds. If the Obligor is unable to live up to the terms of the underlying contractual requirements, then the surety will pay the Obligee recompense for the bond failure.
What’s a Performance Bond?
A performance bond is simple. It guarantees the performance of the contract pursuant to the terms of the agreement. Thus, the agreement has to be completed with the terms being met. For example, if the contract requires a roof on a building, then that building will have to get a roof. Further, most performance bonds have a maintenance period that goes along with the bond. What that means is that the completed project will have to remain in good working condition for a defined period of time. This time period is usually at least one year in length.
What’s a Payment Bond?
A payment bond also protects the Obligee. However, it doesn’t directly reference the underlying agreement. Instead, it simply provides that the Obligor will make certain that all subcontractors are paid. Further, all of the vendors that provided materials for the project will also have to be paid. If they are not paid, then there is a period of time that they can make a claim against the bond so that they can be paid.
If the claims are valid, then the surety will either find another construction company to finish the project or the surety will pay damages to the Obligee.
In conclusion, a performance bond is a type of contract bond. The contract is necessary as it is the underlying agreement that provides the basis for the performance bond. The performance bond makes sure that the general contractor meets the terms of the contract. The payment bond makes certain that the contractor pays for all materials and all subcontractors.