WHAT IS A PERFORMANCE BOND IN A CONTRACT?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

Whether you are a contractor, real estate developer, or homeowner in need of construction services today, you will likely encounter performance bonds.

While these bonds were normally only utilized in the industrial, government, and commercial fields, they are becoming more and more popular in the residential field. This is because they are binding contractors that not only give customers peace of mind, but they ensure that specific projects will get completed in a timely manner as per the required standards.

Regardless, if you want to fully utilize performance bonds to your benefit, you need to understand everything that you possibly can about them. You not only need to know and understand the parties involved in these contracts, but you need to fully understand what they offer and how they work.

Luckily, when dealing with quality performance bonds companies like Stokes Surety Bonds this is something that you don’t have to worry about as much, but it is still pertinent to understand everything you possibly can.

This not only makes you a more informed homeowner, but it ensures that you’ll never get taken advantage of. You’d be surprised at just how many homeowners are getting taken advantage of today in the real estate and construction industries.

TOO LONG; DIDN’T READ (TL;DR)

A performance bond in a contract is a written guarantee between three parties (surety, principal, and obligee) designed to protect the obligee financially if a contractor defaults on the agreement. When this happens, the surety company will either be required to complete the job or financially compensate the obligee, and then have the right to sue the contractor.

UNDERSTANDING PERFORMANCE BONDS AND WHAT THEY OFFER

When dealing with performance bonds it will not be uncommon to hear these things referred to as contracts. This is because that is pretty much what they are. They are binding contracts that ensure specific works get done within a timely manner, per required standards. While every homeowner’s and government agency’s standards might be different, these bonds are oftentimes based are similar circumstances and criteria. For instance, they obviously make sure that everything is done within the local code. Performance bonds are issued by a bonding company and ensure that the contractor follows specific standards.

These types of contracts are growing more and more popular because they offer the obligee the peace of mind that they need when hiring specific contractors. Even if a client or homeowner fully trusts a contractor, it is still a good idea to put one of these contracts in place. This is why they are commonly required in the industrial and governmental industries. If you are a commercial or industrial contractor, you’ll likely deal with these contracts on a daily or weekly basis.

To learn more about this in detail, please take a look at the how does a performance bond work?

WHO ARE THE PARTIES INVOLVED?

In the above, you heard terms like obligee, principal, and surety. When dealing with performance and other types of bonds these are terms that you’ll hear over and over again. While they likely men similar things, a performance bond is a different type of bond than most. It is also important to understand that these bonds are not insurance. While they are somewhat similar and oftentimes mistaken for the same thing, they are certainly not the same. They do offer similar protection and peace of mind, but they are not the same thing. Performance bonds are not a form of insurance!



Knowing the three parties and how they are involved in performance bonds will help you better understand these types of contracts and everything that they have to offer.



1. The Principal – the principal is the contractor or entity doing the work. This likely be the contractor or the real estate developer. These are the entities that are required to apply for the bond.

2. The Obligee – the obligee would be the customer in this situation. This is the entity that requires the principal to acquire and apply for the bond in question. The contractor or principal must make sure they are meeting the standards and requirements of the obligee.

3. The Surety – the last party involved in the entire equation, but perhaps the most important is the surety. This is the company that issues the bond. This will be the company the principle applies to for the bond. Most of the time, the surety is either a bonds company, an insurance provider, or a financial institution. Whatever or whoever one gets a bond though must have in-depth knowledge and complete understanding of the bonding world.

WHY WORK WITH A QUALIFIED BONDING COMPANY?

You just learned above that it is the surety that issues a performance bond. Most of the time, this can either be a bank or financial institution, an insurance provider, or a bonding company like Stokes Surety Bonds. Regardless, contractors will want to make sure that they are always working with qualified bonding companies. This is because each specific bond can be different. Not only this, but bonds in different fields can be different as well.

Construction contractors might have to meet different standards and requirements than what someone in the real estate development industry might have to meet. Whatever the situation, a good, quality performance bonding company like Stokes Surety Bonds can help contractors understand all the ins and outs. A good bonding company will ensure the neither of the parties involved get taken advantage of.

PERFORMANCE BONDS CAN BE CALLED ON

Unfortunately, there are times when a contractor is unable to or can’t meet the required standards of the obligee. When this happens, the obligee has the option of calling on the performance bond. This is similar to that of making a claim with insurance. For instance, if a tree falls on your business, you have to make a claim with the insurance provider to ensure that you receive proper financial compensation. Performance bonds work in a similar manner and theory. The only difference is they are called upon. When specific criteria and standards of a project cannot be met, the obligee has the option of calling on a bond.

That being said, this is something that should be taken extremely seriously. Calling on a bond can have major financial implications for a contractor. Not only can it hurt them financially, but it can hurt their name. If someone sees that the company hasn’t met requirements and standards in the past, they may likely avoid hiring them. Obligees must be careful when calling on performance bonds.

CONCLUSION

When it comes right down to it, a performance bond is nothing more than a binding contract. A binding contract that ensures specific works get completed in a timely manner, in timely fashion. They are something that should be taken extremely seriously, as calling on one can cause major complications for the principal. It will not only make them look bad while hurting their good name, but it could have financial implications for them as well. Regardless of the situation, the surety is held financially responsible by the obligee. The surety then holds the principal responsible for the financial losses they faced.

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