Construction Law

Understanding Performance Bonds featured image

Understanding Performance Bonds

When a contractor wins a bid, an owner will request a performance bond before the start of the project. The performance bond is obtained from a surety company. In the state of Florida, a surety evaluates a contractor’s credit and financial statements. The surety company also evaluates references, resumes, and current work being performed by the contractor.

What’s a Performance Bond?

A performance bond is a type of surety bond contract between a contractor, a surety, and owner. As principal, the contractor must obtain the bond. As obligee, the owner requires the bond protection. The surety company is the party that backs the bond financially but is only liable for the total amount of the bond. The bond ensures legal and financial protection for those involved in a construction project. This contract is a guarantee that the contractor will complete the project including its conditions, cost, and time period as agreed.

Bond Liability

If the contractor is unable to perform his duties as agreed, the surety becomes responsible for the bond. The surety will pay the full penalty amount and other damages incurred when a contractor fails to complete the project.

Payment Bond

A payment bond is usually required along with a performance bond. It protects individuals involved in a construction project against nonpayment for their services. It also covers payment for materials and supplies.

Benefits of Performance Bonds

The most obvious benefit of a performance bond for the owner is the assurance of a project’s completion. The surety protects the owner in the event the contractor defaults on the contract. Contractors are taken through a meticulous pre-qualification process. This process helps determine a contractor’s ability to handle a contract and avoid default.

Disadvantages of Performance Bonds

Performance comes with disadvantages for owners. For one, the surety may not have to owner’s best interest in mind. A surety may accuse an owner of not complying with a bond agreement to avoid paying the owner. Another disadvantage is underestimating losses which means getting less money from a surety to complete the project. A surety may also try to settle for the least expensive solution. If you are involved in a dispute regarding a performance bond, we recommend contacting a Tampa construction lawyer to assist you with your claim.

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Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.