WHO IS THE OBLIGEE ON A PERFORMANCE BOND?
COUNT ON STOKES SURETY BONDS
Both the real estate and construction industries are booming like never before. New buildings, businesses, and homes are popping up on the market every day. This is one of the reasons that performance bonds are becoming more and more popular.
Performance bonds are one form of a construction surety bond issued by a financial institution, insurance company, or bond company, like Stokes Surety Bonds, to guarantee satisfactory completion or proper performance on a project.
While a performance bond might sound like it only protects the obligee, it does also offer protection to all parties involved.
However, to fully understand a performance bond and how they can be used to your benefit, you need to know and understand everything that you possibly can about them.
TOO LONG; DIDN’T READ (TL;DR)
The obligee of a performance bond is the project owner (the individual getting the work done). The obligee requires this bond from the contractor as it is a financial guarantee that ensures the project will be completed as per the outlined terms and within the deadline
HOW MANY PARTIES ARE INVOLVED WITH A PERFORMANCE BOND?
When it comes to performance bonds, you are going to deal with several different terms over and over again. If you’ve dealt with bonds or insurance policies in the past, you’ve likely heard these terms used before. You might not know exactly what they mean, but you’ve likely heard them used in context before. That being said, these terms are principal, obligee, and surety. These terms pretty much are the three parties involved in the bond.
The obligee is the company or individual that’s paying to get the work done. For instance, if you hire an HVAC contractor to come out and install a new heat pump or new ductwork, you would be considered the obligee.
The principal is the contractor, the company, or the individual doing the physical work. In the above scenario, the principal would be the HVAC company.
The surety is the company that issues the bond. While every situation is different, this could be a financial institution, a bonds company like Stokes Surety Bonds, or an insurance company.
Knowing these parties and understanding the role that they play in a performance bond is crucial to properly understand a performance bond and everything that it has to offer.
WHO REQUIRES PERFORMANCE BONDS?
Performance bonds are something that most contractors deal with on a daily or weekly basis. This is especially true in today’s market, as they are becoming increasingly popular. Not only they becoming more and more popular because of the benefits they offer, but more and more customers are starting to require them. Several years ago it was just governmental agencies that required these types of bonds, but now, even residential contractors are having to deal with these types of bonds. That being said, it is the obligee that requests the bonds.
The individual getting the work done has the legal right to require a contractor to get one of these bonds before hiring them. There are some situations where contractors will need performance bonds in place before they can even bid on a job. This is something that’s especially true for government and city projects.
HOW PERFORMANCE BONDS ARE PAID
Performance bonds can vary in terms of cost and payout times. Some performance bonds can even have different payout terms, but they all work based on a similar theory or process.
When a contractor is insolvent, it will cost the obligee financially. The obligee will then request money against the bond, which the issuing party will legally be required to pay. While the surety company is the entity that pays out for the initial costs of the bond, they do legally require the principal or contractor to cover the costs.
That being said, it is important to understand that performance bonds are not the same thing as insurance. While they do work in a similar fashion, they are nowhere near the same thing.
COVERAGE EXTENDS TO THIRD-PARTIES OR SUBCONTRACTORS
While contractors are construction specialists, there are many times when they can’t complete tasks on their own. For instance, you might be hiring a contractor to remodel your basement, but he will likely have to bring in a mold or drywall specialist. If this is the case, he will subcontract the job out.
Luckily, the initial performance bond extends to the subcontractor or subcontractors as well. This means that if the mold specialist or drywall specialist is insolvent, financial compensation will be paid out to the obligee when the project is finished and calculated in full.
This is something that comes in extremely handy for contractors, as they can hire third-parties and never have to worry about being stuck with their financial obligations.
HOW PERFORMANCE BONDS BENEFIT OBLIGEES
When it comes right down to it, the performance bond really was tailor-made for the obligee. It gives them a chance to seek justice as well as financial compensation if the performance standards aren’t met. You might be surprised to hear it, but this is something that happens all the time. Without one of these bonds in place, it would be harder than imaginable for an obligee to seek financial compensation against a contractor.
These types of bonds not only guarantee that work gets completed in a timely manner, but they guarantee that jobs will get completed via the hiring party’s standards. This provides an important sense of security.
HOW PERFORMANCE BONDS BENEFIT THE PRINCIPAL
While it might not seem like it, there are numerous situations in which a performance bond can help the principal as well. Even though they are required to payout in the event of a failure, the performance bond motivates and inspires them to finish jobs promptly.
Not only that, but they help inspire contractors to finish all projects up to par. Along with this, they can help secure jobs in the first place. Just having one of these bonds in place will provide the peace of mind that one needs to get over their fears of hiring contractors.
WHO CAN ACQUIRE THE PERFORMANCE BONDS?
Most of the time, performance bonds are required as part of a contracted project or job. The owner of the project or job will require the performing party to get a performance bond. If you are being required to acquire a performance bond, it is likely before you are working on a public project or someone that’s had previous troubles with past contractors. Whatever the situation, it is the contractor of the company doing that work that acquires a performance bond. Even though this is the case, you can see that these bonds benefit you in these situations as well.
Delaying to obtain a performance bond will only hurt your reputation as a contractor, but it could hurt your company if you are already doing the work. If you end up going bankrupt or run into financial troubles, you might end up facing more financial complications without one of these bonds in place.
To learn more about this in detail, please take a look at how does a performance bond work?
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