Performance Bond Information
Performance Bond Guide
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Below you will find basic terms relating to Performance Bonds.
Parties to the Performance Bond
A surety bond is a three-party instrument
The Principal (This is you) - The person or business with an obligation to perform.
The Obligee - The person, company or governmental entity requiring the bond.
The Surety - The insurance company providing the bond
Purpose of the Performance Bond
The performance bond assures the Obligee that the principal is capable and qualified to perform the contract and protects the Obligee from financial loss should the principal fail to meet the terms and conditions of the contract. A qualified, bonded principal is more likely to complete the project according to the contract provisions. Default is not in the best interest of the surety, principal, or Obligee. When problems occur, the surety may offer financial, technical, or managerial assistance to the contractor to prevent default.
Performance Bond Form
Unlike insurance policies, bond forms are many times provided by the Obligee. In other cases,
a form provided by the surety may be used. It is also common for an industry standard form such as an AIA document to be used. It is important to make sure that the bond form used is satisfactory to both the Obligee and the surety.
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Performance Bond Amount
Because the bond guarantees the construction contract, the amount of the bond is typically equal to the contract value.
Verify your Performance Bond - Fraudulent bonds are prevalent! Make sure you are buying a real bond.
Several resources are available to ensure your bond is from a legitimate source. You may contact your state’s insurance department to verify that the surety is a legitimate company, licensed to issue surety bonds in that state; you may review the U.S. Department of Treasury’s List of Approved Sureties Department Circular 570 (for federal projects); and you also may verify the strength of the surety company through a private company such as A.M. Best, which issues financial strength ratings that measure the company’s ability to pay claims. You should undertake these steps to verify your bond protection early, preferably before signing the contract or paying for the bond.
Performance Bond Term
The term of the bond equals the construction contract. The performance bond typically provides 1 year of warranty coverage.