WHO PAYS FOR A PERFORMANCE BOND?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

There is simply no denying that bonds and insurance are two of the most confusing topics in the world. This is especially true in terms of business. When it comes to business insurance and bonds, you not only have to deal with harsh stipulations, but you are oftentimes left staring at complex and complicated words or lingo that likely mean nothing to you.

That being said, if you are going to get into business today, there is no way around insurance or bonds. Not only do these things protect you in a variety of potentially dangerous situations, but some customers might require them. This is especially true when it comes to performance bonds, the construction, and real estate industries.

TOO LONG; DIDN’T READ (TL;DR)

The contractor will be responsible to pay for the performance bond, and provide it to the obligee. This will be a financial guarantee that the project will be completed as per its outlined terms and within the deadline.

WHAT ARE PERFORMANCE BONDS

Whether you are just getting into the construction or real estate fields, you will eventually encounter what is known as performance bonds. You might even be required to acquire some of these bonds before taking on specific jobs. Whatever the situation, these bonds are extremely complex and one needs to understand everything they possibly can about them before applying for one. A performance bond is one type of a construction surety bond, hence, it is extremely common in the construction and real estate field. It is a bond issued usually by one party in a contract to ensure that the other party meets specific guidelines or obligations.

For instance, if you are in the construction industry, a commercial client might require you to get one of these bonds before signing on for a project. The bond might state that you have to finish a job to specific guidelines. These bonds are ones that can be issued by an insurance provider like Stokes Surety Bonds or through a financial institution like a bank.

THE THREE PARTIES INVOLVED

Performance bonds are extremely common in fields like construction and real estate development. However, they can be required for some commodity transactions as well.



Regardless of the industry or the circumstances, there are usually three parties involved with these types of bonds. This would be the principal, the obligee, and the surety.


1. The Principal – This is the primary entity in the contract that will be doing the work. This would be the construction company or the real estate development firm.

2. The Obligee – The obligee would pretty much be the customer or the client, so to speak. This is the company, individual, or client that is receiving the work. For instance, if the city was hiring a construction company to concrete a sidewalk, the city would be the obligee in the contract. They would likely require the contractor to get one of these bonds to ensure that the work gets done per their standards and requirements.

3. The Surety – The surety would obviously be the company or entity issuing the bond. This could be an entity like Stokes Surety Bonds or it could be a financial institution. 




All this aside, it important for one to understand that a performance bond is not the same thing as insurance. If there is a claim against the performance bond by the obligee, the surety will be help financially and legally responsible. This is why surety companies often highly evaluate entities before issuing these types of bonds.

It is also important to understand that these types of bonds also extend to subcontractors. This means that if the hired company has to bring on another individual to complete specific tasks, that individual will also be covered under the same bond.

UNDERSTANDING THE CLAIMS PROCESS

Unfortunately, there are many times when requirements are not met , meaning that the obligee is not happy with the work that the principal provided. This is why companies and individuals make hired parties get these bonds in the first place. Regardless, when a situation like this occurs, it will be the surety company that is held responsible to rectify the issue. This means that if a principal does not meet specific standards or criteria during a job, the surety will be legally responsible to correct the issue. While the surety company is held responsible by the client, it will be the surety company that holds the principal responsible.

UNDERSTANDING HOW A PERFORMANCE BOND WORKS

Performance bonds are usually ones that are issued or required during governmental or commercial work. For instance, during a bridge construction or a road pavement, the government entity will require the company to perform the work to get a performance bond. However, these bonds are quite common in the private sector as well. It’s not uncommon for a residential client to request a residential construction company to get one of these bonds when doing a complete remodel or remediation.

A performance bond is extremely important for the obligee because they not only ensure that the work will get done per their standards, but they also offer financial protection if the contractor declares bankruptcy or encounters other financial complications that they can’t comply with. Whatever the situation, they offer the financial protection that the obligee needs.

Payment for a performance bond can only be made to the obligee, who is the property owner or government entity. It will also be the obligee that usually claims for financial compensation.

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

WHAT IS REQUIRED FOR A PERFORMANCE BOND

As a contractor, you can likely already see why a company or client might request one of these bonds. That being said, you need to know that in order to get one of these bonds, you will be required to provide certain information. While every issuing party is different, some common things are usually required during the application process.



Most surety entities will ask for the following:


1. The last two years’ worth of financial statements prepared or reviewed by a certified CPA

2. A copy of the contact that the performance bond is currently tied to

3. An application with the surety company

4. Some form of collateral might also be required. This will have to be a piece of collateral that is owned by the contractor or the individual performing the work

BENEFITS AND DRAWBACKS OF A PERFORMANCE BOND

Performance bonds, just like forms of insurance, come with both negatives and positives. Some of the positives should already be pretty clear. However, it might be likely that you don’t know or understand some of the potential downsides to these types of bonds. Some of the benefits of a performance bond are obviously that the obligee will get assurance that the job or task is going to be done per their standards and requirements. Another major benefit of one of these bonds is that the obligee won’t be held responsible for any additional funds required to get the job completed.

While the benefits are pretty apparent, the drawbacks might not be as much. That being said, some of the potential drawbacks are that the surety might try to claim that the obligee didn’t comply with all the terms and conditions detailed in the bond. That’s right, not only is the principal required to follow certain criteria, but the obligee is required as well. Other additional drawbacks are that the surety might try to get the obligee to settle on a lower amount.

NEED A CONSTRUCTION SURETY BOND FOR A JOB? COUNT ON STOKES SURETY BONDS