Contractors are required to be approved for a surety bond facility in order to bid on and to complete most public or government jobs. Once the contract has been awarded, a surety agency will issue the performance bond to the obligee. Failing to secure necessary bonds could disqualify the contractor and result in legal fees and other penalties for the contractor.
How Performance Bonds Work?
Performance bonds provide legal and financial protection for those involved in construction projects. When working on a construction project, the contractor secures this bond to guarantee their work and performance in their contract to whomever requests the bond. Performance bonds guarantee that a contractor will perform all aspects of a project according to the contract. If a contractor fails to uphold their end of the deal, then the performance bond will require the surety to fulfill all facets of the contract. The surety could also be responsible for paying up to the bond’s full face value for delay damages and other costs incurred due to the contractor’s failure to perform.
A Performance Bond is a written agreement between 3 people, which are as follows:
- Principal: person who needs the bond
- Obligee: person who is protected by the bond
- Surety: person who issues the bond
Benefits Of Performance Bonds:
Performance Bonds allow contractors to conform to bidding requirements on government and private projects. If you are bonded, it will increase the number and size of jobs that a contractor will have the opportunity to bid on. Providing performance bonds, in place of other forms of security also allow contractors to retain their working capital.
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