When Can A Performance Bond Be Called?

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When can a performance bond be called?

This is a question that comes up in the context of a construction project. A performance bond, also called an ‘all risk’ bond, is a type of surety bond that reimburses the obligee for any loss or damages to property resulting from defective workmanship or materials during the life of the project. The contract between the owner and contractor generally requires submission of a good faith deposit which serves as security for proper completion of the work by its terms.

Most contracts do not require the contractor to post all types of surety bonds in order to secure performance or bid on a job because most contractors are able to provide some form of financial guarantee like bank guarantees, letters of credit, or warranty deeds (a document whereby either party can demand payment if certain conditions are met, such as the completion of a project).

In some cases, however, the contractor may not be able to provide any form of guarantee and in those instances, the only way for the owner to secure performance is by requiring a performance bond. The bonding company becomes liable if the contractor fails to complete the project or performs below standard.

What triggers a performance bond?

There are three common triggers that will cause a performance bond to be called:

1) The contractor abandons the project;

2) The contractor is terminated for cause; or

3) The contractor fails to meet the terms of the contract.

In most cases, the owner will give the contractor notice and an opportunity to correct the deficiencies before calling on the performance bond. If the contractor fails to take corrective action, then the owner can call on the bond.

The bonded company usually has a claim procedure in place which must be followed in order to make a claim against the bond. The process can be cumbersome and time-consuming so it’s important to seek legal assistance if you need to make a claim. 

When would you use a performance bond?

A performance bond is generally used in construction projects but can also be used in other industries like oil and gas. It’s important to note that not all contracts require a performance bond and the decision to require one should be based on the risk involved in the project.

In general, a performance bond is used when there is a higher risk of contractor default. Some factors that may contribute to this include:

1) The contractor is new to the industry;

2) The contractor has a poor credit history;

3) There is a lot of money at stake; or

4) The project is complex or high-risk.

It’s important to consult with an attorney if you’re considering requiring a performance bond in order to get a better understanding of the risks involved and whether or not it’s the right decision for your project.

What is a subcontractor performance bond?

A subcontractor performance bond, also known as a ‘supply’ bond or ‘supplier’ bond, is a type of surety bond that reimburses the obligee for any loss or damages to property resulting from defective workmanship or materials during the life of the project. The contract between the owner and contractor requires submission of a good faith deposit which serves as security for proper completion of the work by its terms.

The majority of construction contracts do not require subcontractors to post all types of surety bonds in order to secure performance because most contractors are able to provide some form of financial guarantee like bank guarantees, letters of credit, or warranty deeds (a document whereby either party can demand payment if certain conditions are met, such as the completion of a project).

To know more about performance bonds, check out Alpha Surety Bonds now!

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