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What are Contract Bonds?
Performance bonds are a type of contract bond that guarantee that a contractor will adhere to the terms and conditions of a contract. Upon winning a bid (where a bid bond may have been required) and receiving a contract, contractors needs to submit this type of bond.
Usually, performance bonds and payment bonds are issued together as they are closely related.
Like all surety bonds, performance bonds act as a three-way agreement between the principal (contractor), the obligee (the government or a client) and the surety bond company providing the bond.
The performance bond is meant to protect the obligee in the case of principal default due to delays, inability to complete work on a project, or other performance issues.
In the case of a legitimate claim brought up against a contractor, the surety steps in and resolves the claim.
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Contract Bond Types
Bid Bond Bid bonds reassure project developers that contractors submit serious bid proposals and have the financial credentials necessary to accept the job. If a bid is selected and the contractor declines the job or retracts the bid, the project developer can make a claim on the bond to collect the difference of the original bid and the next highest bid.
Contractor License Bond A contractor license bond is a type of license and permit bond. Contractors must purchase these bonds before they can receive their contractors license to ensure contractors follow all applicable licensing laws and regulations.
Maintenance Bond Maintenance bonds protect against defective materials and workmanship following a project’s completion. If the project is found to be defective following completion, the bond amount can be used to pay for repairs that need to be made.
Payment Bond Payment bonds guarantee payment for services in the case lead contractors go bankrupt when working on projects. The bond amount can be used to reimburse those who worked on a project if the lead contractor is unable to pay them for their work.
Performance Bond Performance bonds guarantee that contractors complete construction projects according to the contractual terms. If a contractor fails to do so, the project developer can make a claim on the bond to access funds that can be used to pay another contractor to finish the job. The Federal Miller Act requires that performance bonds be used on all federally funded projects worth $100,000 or more.
Site Improvement Bond Site improvement bonds guarantee the completion of certain renovations and/or improvements made to projects, properties or structures.
Subdivision Bond Subdivision bonds require contractors to build and/or renovate public structures within subdivisions – such as streets, sidewalks and waste management systems – according to local specifications. If a contractor fails to do so, the bond amount can be used to complete the subdivision project appropriately.
Supply BondSupply bonds mandate suppliers to provide materials, equipment and supplies as defined in purchase orders. If the supplier fails to provide the supplies as agreed, the bond amount can be used to reimburse the purchaser for the resulting loss.
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