A surety bond is a third party guarantee that the principal (insured) will comply with specific provisions of the bond. A performance bond is a surety bond that guarantees that the principal will "perform" specific contract requirements. Also known as a contract bond, this obligation secures the completion of a construction project or in the case of a service or supply agreement, faithful performance of the terms of the that agreement. Often required on public projects (and obligatory under the Heard Act, the Miller Act as well as various state "little Miller" acts), the bond provides benefits to all of the parties with interest in the project.
"Bottom line", all of the interested parties understand that when a competent surety bond underwriter approves a contractor, that the surety has carefully considered the qualifications of the bond applicant before committing itself to guaranteeing his or her work. Contract surety underwriting significantly mitigates the risk of a contractor failure in an inherently risky industry with high failure numbers.
A performance bond premium (cost) is based on the contract total. Usually the bond penalty (bond amount) is equal to the project total, but not always. The obligation guarantees all of the provisions of the contract and will pay the obligee (project owner) money up to the full penalty. Generally, a performance bond is an irrevocable, strict guarantee however that does not mean that the contractor and surety are necessarily at the mercy of the project owner. The obligee must also comply with its obligations to the contractor. An obligee default can result in a full release of the contractor and his surety from their joint obligation.
Interested in learning more about contract surety bonds? We recommend two excellent publications on the topic at PerformanceBond.com. Call us at (800) 373-2804, email Underwriting@SuretyOne.com or click here to chat with an underwriter real-time. Performance bond leader, Surety One, Inc. is an experienced underwriter of contract surety bonds. We provided unmatched support of your bid 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.
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