When a contractor is hired to complete a project, they may be required to post a performance bond. This document guarantees that the contractor will complete the project according to the agreed-upon specifications. But who retains the original of this document? And what happens if the contractor fails to meet its obligations? In this blog post, we will answer these questions and more!
Understanding performance bonds
Understanding performance bonds is important for any business owner, as they can protect against financial loss.
Performance bonds are a type of surety bond that is typically required by the government or a prime contractor when awarding a contract to a subcontractor. The purpose of the performance bond is to protect the project owner from financial loss if the subcontractor fails to perform their obligations under the contract.
There are three parties involved in a performance bond: the obligee (the party who requires the bond), the principal (the subcontractor who is required to purchase the bond), and the surety (the company that issues the bond).
Are performance bonds returned?
The answer to this question is not always simple. The terms of the performance bond will determine when, and if, the bond is returned. In some cases, the entire bond may be returned at the completion of the project. In other cases, a portion of the bond may be held until all warranty work is completed.
Who is the principal in a performance bond?
The principal in a performance bond is the party who agrees to perform the obligations of the underlying contract. The surety provides the bonding company’s guarantee that the principal will perform its contractual obligations. If the principal fails to do so, the surety may be required to pay damages to the obligee.
Who retains the original of a performance bond?
The original of a performance bond is typically retained by the surety company. The obligee (the party who requires the bond) may also request to keep the original. A copy of the bond should be provided to the principal (the party providing the bond). The principal should keep this copy for their records.
What happens when a performance bond is called?
If a contractor fails to perform the work specified in their contract, the project owner can make a claim on the performance bond. This is known as calling the bond. The surety company that issued the bond will then investigate the claim. If they find that the contractor did indeed breach their contract, they will pay out damages to the owner up to the amount of the bond.
How a surety company will handle a call on a performance bond?
When a surety company is notified of a potential claim on a performance bond, the surety will immediately begin its investigation into the matter. The surety will want to determine if there is any merit to the claim and, if so, how much financial exposure the surety is facing. The surety will also contact the principal (the company that purchased the bond) to notify them of the claim and to begin working together on a resolution.
How do you close out a performance bond?
The easiest way to close out a performance bond is to simply have the project completed. The surety company that backed the bond will then release any remaining funds to the obligee, and the bond will be closed.
What is the cost of a performance bond?
The cost of a performance bond is typically a percentage of the contract value and is set by the surety company. The premium for a performance bond is usually paid by the contractor and is generally based on the creditworthiness of the contractor and the project’s financial risk.
Where can you get a performance bond?
You can get a performance bond from a surety company. A surety company is an insurance company that specializes in providing bonds. The premium for a performance bond is usually a percentage of the contract value, and the term of the bond is usually the same as the term of the contract.
Can you get a performance bond with bad credit?
The short answer is yes, you can get a performance bond with bad credit. However, the process may be more difficult than if you had good credit. You may have to put up more collateral, or agree to a higher interest rate. Nevertheless, it is possible to get a performance bond with bad credit.