If you are in the construction or repair industry, you are probably already familiar with performance bonds. For those who do not know what this is, an explanation is in order. A performance guarantee bond is basically a surety bond that is issued to a contractor. The bond is held pending the completion of a project. These bonds protect a contractor’s client in the case that performance does not happen. Find out more about the workings of these bonds.
The Parties Involved
There are three parties to every performance bond. The first is the surety, or the insurance company. The surety makes sure that the contractor carries out the work as promised. The next party in the contract is the principal, or the contractor. This is the business that is carrying out its contractual obligation. Finally, the client is referred to as the obligee. This is the party to whom performance is due. All three of these parties make up a valid performance guarantee bond.
Different Scenarios
In some cases, the parties listed above may change due to the circumstances. For example, a contractor may act as the obligee in a performance bond where the subcontractor is the principal. This situation is often referred to as bonding back. It is a common thing to see in the construction services industry.
In the Event of Default
If the principal does not perform his or her role, there are certain steps an obligee can take. First, the obligee can request that the principal follow through with the promise. If this is not possible for some reason, the principal may have to pay out of the bond to correct the matter. The damages in any given case are limited by the total value of the bond.
One thing for principals to understand is that a performance guarantee bond is not the same as insurance. Thus, when there is a default, the principal will need to pay. This differs from insurance where the insurer pays on a claim.
Getting Bonded
If you need to obtain a performance bond, make sure you know what you are getting in to first. Remember, as the principal, you can still be liable for money out of your pocket. Of course, the best thing to do is to perform your role as planned to avoid default.
