Helpful Questions on a Construction Performance Bond

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If you have been a contractor for some time now, you would have some idea about surety bonds. They are of different types like bid, performance, labour, and payment. Before you can start working on a construction project, its owner will require you to have a construction performance bond that protects them from financial losses and disruptions. If you fail to fulfill the obligations mentioned in a contract, walk away from it, or haphazardly complete a project, the owner could file claims and recover the financial damages. However, if you don’t provide the bond surety, the project owner might refuse to hire you. How does the bond work, and what are some essential questions about this document? Find the answers to these questions below. 

What is a construction performance bond?

A construction performance bond is a legal document that guarantees the contractor completes a project on time efficiently, without causing any disruptions. Owners might require the bonds for 50% or 100% of the total amount mentioned on the contract. Suppose the contractor walks away from the contract obligations or fails to perform their contractual duties. In that case, the owner could file a claim under the bond for adequate financial compensation for their losses. 

Who are the parties involved in the bond?

These types of bonds involve three parties: contractors (principal responsible for completing a project), surety (the party which acts as a guarantor), and project owner (obligee). If the contractor fails to complete a project or parts of it according to the contract’s requirements, the surety or guarantor would have to pay for those losses incurred by the owner. However, you (as the contractor) will have to repay the amount to the surety eventually because, unlike an insurer, they don’t provide you compensation.

Do all contractors require them?

Most construction companies involved in public or government projects worth over 500,00 CAD$ or more will require a bond. Some of the industries that have made this document an integral part of their contract agreement are: electrical, road paving, mechanical, plumbing, HVAC, technology, sewer, and maintenance. You will have to buy this bond if you are a tree cutter, snow remover, or janitorial. Many private sector companies in the construction industry have also made it mandatory in their tender specifications to have this bond. 

What are their different types?

Performance bonds have three subtypes: CCDC, Form 32, and SAC Headstart contractor. CCDC is a standard bond the Canadian Construction Documents Committee issues, stating a contractor’s obligations. Form 32 is a document created under Section 85.1 of the Construction Act in Ontario, Canada, enabling owners to claim damages for violation of any contractual obligations. It also contains details like the performance bond’s objectives, penalties, terms, and parties involved. SAC headstart is another document used by general contractors to make claims against subcontractors. 

What happens if you don’t pay the surety?

Since the surety is not your insurer, you will have to repay them the money they paid on your behalf to the obligee. If you fail to make the repayment, the bond company might initiate legal proceedings against you.

How can you avoid bond claims?

Most disputes between the contractor and the obligee arise from design, schedule, and perceived defects. If you think there might be a delay in the work, it is better to inform the owner immediately while letting them know the reasons behind the delay. They should also abide by the resolution mechanisms mentioned in the contract always. It is also crucial to have a documented record of all discussions between you and the contractor since that would be a reliable source of evidence if there’s a dispute. However, it is better to ask your surety broker solutions company regarding the most effective ways of avoiding claims beforehand. 

How can a surety broker help you?

You must consider contacting an experienced surety broker for obtaining the performance bond, as they would assist you with every step. Since they are in touch with several surety companies, they will help you find one suitable for your requirements. Your bond broker will also handle all negotiations between you and the company that issues the bonds. Besides providing you with the information you need for applying, they will also ensure your file is updated. You might even consider asking them about the bond companies they work with.
These are some helpful questions regarding a construction performance bond that will give you an idea about the document and its importance. Hiring the services of a surety broker will ensure your bonding process is smooth, hassle-free, and quick.

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