WHEN ARE PERFORMANCE BONDS RELEASED?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

Bonds and insurance can be extremely confusing and complex. This is even true for individuals and companies that are somewhat familiar with them and everything they have to offer.

Heck, there are contractors and real estate developers that deal with performance bonds all the time and don’t know everything there is to know about them. It is essential to understand how does a performance bond work? because misusing one or not using one right could severely hurt contractors.

If you are the contractor, you’ll certainly want to make sure that you don’t get a performance bond called on you. This will not only hurt your reputation, but it could hurt you financially. Regardless of the situation, understanding performance bonds in and out are extremely important in today’s fast-paced world.

In addition to this, you’ll want to make sure that you are always working with an entity like Stokes Surety Bonds that fully understands the complexities of performance bonds.

TOO LONG; DIDN’T READ (TL;DR)

Ideally, the performance bonds are released once the project has been completed. This means that the contractor doesn’t have to be tied to the project for a lifetime. However, some public work contracts do require the contractors to provide a one year warranty once the project has been completed. If any issues arise during the warranty period, the contractor will be required to resolve these issues, free of charge.

WHAT EXACTLY IS A PERFORMANCE BOND?

When it comes right down to it, a performance bond is nothing more than a binding contract. A binding contract that ensures work is going to get done within a proper time, in a timely manner. It basically guarantees the obligee that they are going to get work done per their required standards. This is something that gives obligees peace of mind. Principals or contractors that use these types of bonds can put customer’s minds at ease because it’ll guarantee them that they will perform the work per code and required standards.

Performance bonds are contracts that are provided by a bond company like Stokes Surety Bonds to protect parties from concerns of contractors becoming insolvent before finishing certain projects. While they are most commonly used by customers in the construction commercial industry, they are becoming more and more common in residential construction and real estate development. This is because they offer a lot of protection, which is something that is highly needed in today’s competitive and complicated world.

WHO IS INVOLVED IN A PERFORMANCE BOND?

SureUsually, when dealing with bonds, like performance, bonds there are three parties involved. This is not necessarily always the case in all situations, but it is more commonly true than not. That being said, this is why it is more than pertinent to understand the three parties involved in these types of contracts.

Not only do you need to know and understand the three parties involved in the contract, but you need to understand how they are involved. With performance bonds, it is the obligee, the principal, and the surety that are involved in the contract. Understanding each party and what they bring to the table is pertinent to fully understand what performance bonds are and how they can help both contractors and customers.

That being said, it is the obligee that is the customer, while the principal is the contractor. The surety involved in the whole equation is the party that issues the bond. In most cases, this is either an insurance company, a bonding company like Stokes Surety Bonds or even a financial institution like a bank can issue such contracts. Dealing with a company like Stokes Surety Bonds that fully understands performance bonds is more important than imaginable for all parties involved.

WHEN ARE PERFORMANCE BONDS REQUIRED?

If you are a contractor and you are being required to get a performance bond, it doesn’t necessarily mean that something is wrong. It doesn’t even necessarily mean that the requiring party doesn’t trust you. There are plenty of customers that require these types of bonds because they have to.

This is especially true in government construction and real estate development. Any time you are dealing with government projects, you and your company will likely be required to acquire one of these bonds. Fear not though because while these bonds seem like they only protect the customer or the obligee, there are also numerous unique ways that they can benefit the principal or contractor as well.

That aside, performance bonds are commonly used in the construction and real estate fields to ensure the owner of specific projects that the value of work will not be lost in the unfortunate event of insolvency. Even if a contractor goes bankrupt, these bonds will offer financial protection.

Keep in mind, just because a performance bond is required by specific parties it doesn’t necessarily mean that the contractor has to get one. However, not doing so will likely result in the contractor not getting the job. It will likely go to a company that is willing to comply with such requirements.

WHEN TO NOT WORRY ABOUT PERFORMANCE BONDS ANYMORE?

Luckily, performance bonds are not something that stays in place forever. Although they are binding, the contractor doesn’t have to worry about being beholden to a project forever. In fact, when a construction project or real estate development deal is over, the performance bond will be done.

It is important to know that bonding companies regularly send out what are known as status inquires. These are forms to public agencies inquiring about the status of specific projects. The surety company will send these inquires out to the obligee to check and see how projects are going.

Surety companies like Stokes Surety Bonds and issuing parties have to do everything they can to ensure that projects are being complied with. If they do not, they may end up suffering from financial repercussions. This is because the issuing party of the bond is the one that has to cover the financial obligation when the principal becomes insolvent. That being said, these status inquires will usually contain specific questions. While each issuing company is different and asks different questions, they do somewhat follow a similar format.



Surety companies will oftentimes ask questions like:


1. How much of the project has been completed?

2. What is the dollar amount of the total contract that’s been paid?

3. When is the anticipated completion date of the project in question?

4. Are there any unpaid labor or material that the public agency doesn’t currently know about?

5. Is the government agency or entity currently satisfied with the work that’s been performed?



When a project is completed in full per the obligee’s required standards, there will be no need to worry about performance bonds anymore. In these situations, surety companies will oftentimes issue letters that read something like the following:

The bonding company is hereby released from all past, present, and future obligations required by this bond. Please confirm that you are pleased with the work that’s been provided thus far by signing the bottom form and returning it.

PROBLEMS WITH THE ENDING OF PERFORMANCE BONDS

If one received a letter from the surety company with the above information they would likely think that the bond was over. Unfortunately, this is necessarily not always the case. There are several problems with the above letter.

The first would be that even though the work on the project is completed in full per the required standards, most public work contracts require the contractor to guarantee or warranty work for a year after the completion date. This means that the contractor is still beholden to the project a year after it has been completed. If something goes wrong within that year, the contractor will likely be required legally by law to come back and rectify the issue, free of charge.

In addition to all of this, the original payment and performance bond records are a matter of public record. It will be retained by the public agency, even when the work is completed in full and the warranty has expired. If the agency returns the original bond to the surety, they are still at risk of an audit.

CONCLUSION

As you can see, performance and similar bonds are serious business. They certainly are not something to be taken lightly. This is especially true when it comes to calling and releasing the bond. Doing so can have major implications for the construction company or contractor. It will not only hurt their reputation and good name, but it can require them to fulfill certain financial obligations. Regardless, performance bonds should be taken extremely seriously by all parties involved.

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