Construction is an inherently risky business. Even the best general contractor can experience difficulties. For that reason surety bonds are required on large and public projects. A performance bond generally guarantees that a general contractor (the “principal”) will complete a job in full compliance with the project specifications, within the budget agreed to and within the time frame specified in the job contract. So what happens when a principal defaults? That is never a good situation for a contractor to find him or herself in however there are a couple of options available to the surety when it is called to step in.
Kim Slowey, a contributor to ConstructionDive.com has written a good, informative piece about contractor default when the underlying project is bonded. “The Dotted Line: What happens when a bonding company is called in“. In this article Kim explains a surety’s privileges upon receipt of notice of default.
- Settle the matter with the project owner by payment.
- Deny the performance bond claim.
- Surety’s right to take over and complete the job.
- Surety’s right to tender a replacement contractor.
This is a good basic understanding of how a surety company might seek to remedy the breach that caused a bond claim. There is however another option mentioned outside of the numbered list of options, one which a surety may choose if the general contractor has a significant history of good business with it. The surety may finance the principal to get him or her back on site to complete the contract. As Kim points out correctly quoting Andrew Thome, President and CEO of J.W. Terrill, the surety will “investigate every claim and make sure there’s a default. After the investigation, he said, “they’re going to come up with a resolution that’s the most timely and economical for the parties involved.” Surety stands in the shoes of the principal/contractor so ultimately it is a unilateral decision as to how the surety will mitigate its potential losses. This article is a good read which reinforces how important it is that a contractor maintain open amicable lines of communication with his or her surety company.
Interested in learning more about contract surety bonds? We recommend two excellent publications on the topic at PerformanceBond.com (Learn page). Call us at (800) 373-2804 or email Underwriting@SuretyOne.com for more. Performance bond leader, Surety One, Inc. is an experienced underwriter of contract surety bonds. We provided unmatched support of your bid, payment and performance bond need, based on our knowledge about the industry and our focus on our personal relationship with contractors. We facilitate expeditious review and response to your bid bond request in a polite, clear way.