A performance bond protects the owner if the contractor defaults. The contractor (principal) buys it from a surety, naming the owner as obligee. If the owner properly declares a default, the surety investigates and then picks a path: finance the original contractor to finish, bring in a completion contractor, tender a new contractor to the owner, or pay the owner up to the penal sum.
Public work usually requires performance bonds alongside payment bonds, commonly at 100% of the contract amount. GCs may also require them from major subcontractors, sometimes as an alternative to subcontractor default insurance.
A performance bond is not insurance for the contractor. If the surety pays, it will seek reimbursement from the contractor and its indemnitors under the general indemnity agreement.
Why it matters
Bond premiums are a real job cost, and every bonded job uses bonding capacity. The default and notice steps written into the bond form, such as AIA A312, matter a lot when a job goes wrong.
Worked example
Illustrative: Riverside Medical Center’s original contract is $48.2M. A bond written at 100% would carry a $48.2M penal sum at award. With $1.1M of approved change orders, the contract is now $49.3M. Some bond forms increase the penal sum with change orders automatically; others need a rider. Read the form.
Common mistakes
- Treating the bond like insurance that protects the contractor.
- Skipping the bond’s notice and conference steps before terminating, which can release the surety.
- Not tracking whether the penal sum follows change orders.
How os.construction handles it
We’re building contract records that keep bond forms, penal sums and change orders together, so the bonded amount is clear at any point. It’s in development.