Who submits the performance bond?
A party usually has to submit a performance bond if his/her contract requires it. However, the general rule is that each party should perform its own contractual obligation and not rely on the other party to do so.
For example, when A contracts with B for C to build an apartment building for $1 million, A has no need for a performance bond since he will be paying B directly. However, if the contract says that A will pay $1 million to B’s bank account but there is nothing in the agreement requiring B to use this payment only for construction costs (B could steal the money), then A may ask for B’s bank or any other person post a performance bond before accepting the payment.
A may also ask any person who is required to enforce the contract against B for a performance bond before providing that enforcement.
For example, if A contracts with B to pay $1 million for construction work but there is nothing in the agreement requiring B to hold this money only for construction work (B could use it elsewhere), then A may ask C, who has an obligation under the contract to force B to deliver on his obligations, post a bond. Likewise, if anyone else must step forward and perform the contract if B fails to do so (e.g., suppliers or subcontractors) they too may be asked by A to post bonds.
Who is responsible for the performance bond?
The first thing to note about a performance bond is that some jurisdictions don’t recognize them as valid, but most do. There may be some questions as to whether there is a consideration in other words, whether you are paying for their promise of good work (usually true) or whether they are taking some kind of risk by accepting your contract (less likely).
If there is any doubt on this point, the parties might avoid the difficulty by simply making sure that both sides have adequate remedies available should either side fail to carry out its responsibilities.
There are two types of performance bonds: one that is signed by the contractor (the surety bond) and another that is signed by both parties (the contract bond). The former is usually used when there is only one contractor; the latter may be used when several contractors are involved in a project.
What are some considerations in submitting a Performance Bond?
A performance bond ensures that the client is secured financially when hiring a contractor or subcontractor to perform work for them. A financial responsibility requirement, it must be prepared by an authorized surety company and is executed through the contractor(s) on-staff managing agent.
It specifies that if the project’s requirements are not fulfilled, the surety company will compensate for any loss suffered by the owner. The following are some considerations when preparing a performance bond:
- The indemnity agreement should ensure payment of claims for contracts awarded but do not proceed due to contract default. Availability of funds is important so adequate cash flow can act as security in case there are delays/disputes.
- The surety company must be able to act on the judgment of its own accord without requiring permission from the contractor or owner. If there is no consent, it will require further action.
- The indemnity agreement may also provide for replacing subcontractors if performance is lost due to contractor default.
How long is a performance bond in effect?
A performance bond will remain in effect for a period of time agreed upon by the surety and the contractor. The payee may ask for a release from the surety at any point during this time, but cannot demand it.
This is because performance bonds are only required to ensure that the general contractor will complete his part of the work promised. If there is an issue with payment, then this should be handled through debt collection channels. Once the debt has been satisfied the bond can be released and paid out to you as per your agreement with the provider.
How do you issue a performance bond?
Performance bonds are issued to ensure that contracted work is performed as promised. The terms of performance are outlined in the contract between the contractor and the property owner.
A performance bond ensures that if for any reason, or no reason at all, the work is not completed according to these terms, reimbursement will be made by the surety company providing the bond.
Documentation required prior to issuance of a performance bond include proof of workers’ compensation insurance, proof of employer’s liability insurance, proof of licensing/certification where appropriate, and evidence that subcontractors have been selected.