Surety Bonds: Performance Bonds

The Performance Bond follows the Bid Bond if the Principal (Contractor) was deemed low bidder and is awarded a contract. The Performance Bond guarantees that the contractor will complete the contract in accordance with the terms, conditions and specifications of the contract. The Performance Bond is required as a condition of being awarded the contract.

A Performance Bond guarantees the owner that the Principal (Contractor) will complete the contract according to its terms including price and time. The owner is the obligee of a Performance Bond, and may sue the Principal and the Surety on the bond.

If the Principal defaults, or is terminated for default by the owner, the owner may call upon the surety to complete the contract. Many performance bonds give the surety three choices: completing the contract itself through a completion contractor (taking up the contract); selecting a new contractor to contract directly with the owner; or allowing the owner to complete the work with the surety paying the costs. The penal sum of the performance bond usually is the amount of the prime construction contract, and often is increased when change orders are issued. The penal sum in the bond usually is the upward limit of liability on a performance bond. However, if the surety chooses to complete the work itself through a completing contractor to take up the contract then the penal sum in the bond may not be the limit of its liability. The surety may take the same risk as a contractor in performing the contract.