Construction Bond Claims - Part 3
So far, we have covered Bid Bonds and Payment Bonds. For our third and final exploration of bonds claims, we will take a look at Performance Bonds.
Performance Bonds, a common type of surety bond, are issued either by a bank or surety company and provide a guarantee that a contractor will finish a project on time while meeting the agreed-upon specifications. Should a contractor fail to deliver on a project, either by not completing it or otherwise failing to meet their obligations, the developer of the project can attempt to recover their losses by demanding payment equal to the bond's value. This is known as "calling the bond."
It's been said that handling a performance bond claim is like driving an ambulance and not a hearse. Every claim has varying levels of urgency, cooperation/agreement among the participants, and unique challenges.
When a bond obligee, the project owner, decides to call a performance bond, the claims process is set into motion. When a call is made on the performance bond, the first thing the surety company will do is launch an investigation.
The typical process is as follows:
- Acknowledge receipt of the claim and send an intial request to the project owner for information and documents;
- Send an intial request to the principal for documented position;
- Review the underwriting file, which is comprised of a credit file and a bond-specific file;
- Review the contract documents and bond form;
- Perform an accounting of remaining bonded contract funds;
- If appropriate, assemble an investigative team, which can include outside legal counsel, a construction consultant, and sometimes an accountant; and
- Attend a site visit and in-person meetings.
If the surety company determines that conditions have been met when the performance bond is called, they will then move on to one of four different options for handling the situation:
1.) Help finance the principal,
2.) Find a new contractor,
3.) Complete the project, or
4.) Do nothing.
The right surety partners will work with contractors to avoid claims, and if the situation is unavoidable, to mitigate the severity of it. Choosing the right surety with a track record of resolving claims while minimizing legal fees is important for any contractor to consider.