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California Business Journal
Performance Bonds in Construction

Performance Bonds in Construction: What Are They and What You Should Know

The construction industry is a complex one with many moving parts. They can go wrong when things go wrong, costing contractors and owners time and money.

by John Jenkins, Special to California Business Journal
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The construction sector is one of the most heavily regulated industries in the United States. Employees have been using wearable trackers increasingly. Even work boots now have sensors.

Federal, state, and local governments work to ensure construction projects are completed according to plan, on time, and within budget.

You’ve likely heard of performance bonds if you’re in the construction industry. But what are they, and what do they mean for your business?

This post will explain things you need to know about performance bond construction. It will discuss what they are, how they work, and why you might need one for your next project.

What are Performance Bonds?

A performance bond is a surety bond used in the construction industry. It is a three-party agreement between the Owner (or Obligee), the Contractor (or Principal), and the Surety.

Owner: The party requesting the bond will be protected.

– In the case of a construction project, the Owner would typically be the Developer, General Contractor, or Subcontractor.

– Contractor: The party who will perform the work and is bonded by the Surety.

– Surety: The party who provides the bond and guarantees the Owner that the Contractor will perform according to the terms of their agreement.

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A performance bond can protect an owner from financial loss if a Contractor fails to complete their work or meet the standards outlined in their contract. The Surety provider will step in and cover any cost overruns or damages up to the total amount of the bond.

Benefits of Performance Bonds

Here are some advantages of a performance bond in the construction industry.

1) They Protect The Owners From Loss

If the contractor cannot complete the project or defaults on the agreement terms, the owner can claim the performance bond. It will help recoup any losses incurred by the owner.

The surety company will then investigate, and if they find that the contractor is at fault, they will pay the claim.

The surety company will then go after the contractor to get their money back.

It protects the owner from having to front any additional money for the project and any legal fees resulting from a contractor default.

2) They Protect The Taxpayer’s Investment

Performance bonds also protect taxpayers from wasting their money on a not completed project. If the company does not complete the project, the surety company will pay for its completion.

It protects the taxpayers’ investment in the project and ensures that their money is not wasted. It also prevents the government from stepping in and completing the project, which would cost taxpayers even more money.

Performance bonds are a great way to protect yourself and your investment. Make sure you understand them before signing any construction contracts.

3) They Protect The Lenders

Lenders are another group that performance bonds protect. If a contractor defaults on their loan, the lender can claim the bond and recoup their losses.

It protects lenders from taking too much of a loss in the event of a default and encourages them to continue lending money for construction projects.

Conclusion

The construction industry is a complex one with many moving parts. They can go wrong when things go wrong, costing contractors and owners time and money. Hence, it is best to keep performance bonds.

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John Jenkins, Special to California Business Journal

John Jenkins, Special to California Business Journal

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