Performance Bond
A surety bond guaranteeing that a contractor will complete a construction project according to the contract terms and specifications.
What It Is
A performance bond is a type of contract surety bond that guarantees the principal (typically a general contractor) will complete a construction project in accordance with the contract documents. If the contractor defaults — by abandoning the project, failing to meet specifications, or becoming financially unable to complete the work — the surety has several options: financing the original contractor to complete the work, hiring a new contractor, or paying the obligee the cost to complete less the remaining contract balance.
Performance bonds are most commonly written on AIA A312 or federal Miller Act bond forms. The penal sum (bond amount) is typically 100% of the contract price for public projects, though private projects may require less.
The surety's obligation under a performance bond is triggered by a formal declaration of contractor default by the project owner, typically after providing notice and an opportunity to cure.
Why It Matters for Brokers
Performance bonds are required on virtually all public construction projects in the United States (federal projects over $150K under the Miller Act, and state/local projects under 'Little Miller Act' statutes). Many private owners also require them. For brokers, understanding the performance bond process is essential because a bond claim is very different from an insurance claim — the surety becomes actively involved in project completion decisions.
Real-World Example
A paving contractor defaults on a $3.2M highway resurfacing project after completing only 40% of the work due to cash-flow problems. The state DOT declares the contractor in default and makes a claim on the performance bond. The surety evaluates the situation, determines the remaining work will cost $2.1M, and hires a completion contractor. The surety pays the completion costs and later seeks reimbursement from the defaulted contractor under the indemnity agreement.
Common Mistakes
- 1Not understanding that the surety controls the completion process after a default — the project owner cannot simply hire anyone and send the bill to the surety.
- 2Failing to distinguish between the bond's penal sum and the surety's actual exposure, which is the cost to complete minus the remaining contract balance.
- 3Assuming performance bond coverage transfers to subcontractors — the performance bond protects the project owner, not subcontractors or suppliers.
How brokerageaudit.com Handles This
Document Processor reads performance bond forms, extracts penal sums, principal/obligee details, and contract references. The system tracks active bonds against project timelines and alerts brokers to upcoming project milestones that may require surety communication.