I Hope Your Performance Bond Doesn’t Say This!

Alex BarthetBonds

I hope your performance bond doesn’t say this!

  • Performance bonds come into play when the contractor is not fulfilling his obligations under the terms of the contract

If your project requires you to present a bond as a contractor, or you demand, as an owner, a bond from the general contractor, you need to make sure that you properly negotiate the terms of that payment and performance bond. This bond will come into play if the contractor is not doing what he or she promised – not fulfilling his/her obligations under the terms of the contract, either in time or in scope. So, what should your performance bond say and not say?

Shorten the amount of time and remove the requirement of a meeting from the terms and conditions of your performance bond

As the owner, you want to have as much leverage as you can over the contractor and the surety. To do so, you need to remove from the performance bond all references to notices and meetings. A standard AIA bond form will typically say you need to provide a notice in advance of a default or termination and you likely must have a meeting before you can actually pull the trigger and invoke the surety’s liability.

That is not the leverage you want as an owner. You want the surety to be actively involved if you have a problem with your contractor. So, you want the right to provide notice of default or termination requiring the surety to act. You don’t want to have to attend meetings. You want to create a specific time line- ideally a short one- will get that surety involved right away. It is costing you money when your job is not getting done. So, shorten the amount of time and remove meetings from the terms and conditions of your performance bond.

Make sure you have the right to trigger that surety bond, not on only a termination but even on a default

Default is any type of problem on the job that constitutes some violation either material or technical with respect to your contract with the contractor. A termination typically requires a material default and may require notice and opportunity to cure. A termination is a much higher standard than a default. As an owner, if you are getting a performance bond from your contractor, you want to have the right to bring this surety in not just on termination, but even on a default. It is a much lower standard. It gives you a lot more leverage over the contractor and the surety.