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It is important to know that surety bonds are very different than insurance. If there is a legitimate claim on a bond due to contractor default or incomplete performance, the Surety will hire another contractor to complete the project or repair the defective work, or the Surety will complete the project or repair the defective work themselves. The originally bonded contractor is then responsible to reimburse the Surety for all costs the Surety incurred for addressing the claim and completing the project up to the originally bonded amount, including legal fees. Therefore, applying for Surety credit is similar to applying for an unsecured loan in that a bond is an unsecured credit instrument wherein the surety is backing the Principal to perform with its very strong creditworthiness. As such, the performance bond acts like insurance to the Obligee, not to the Principal.
A Performance Bond is required by a project owner, known as an Obligee. They are normally requested by governments, local, state, and federal, governmental agencies, private project owners, and in the case of subcontractors, many prime contractors. The Obligee requires the bond because they want a guarantee that a project will be finished on time and under budget. An Obligee will also require a bond so they can know a contractor is capable of completing such a project because an unbiased entity has reviewed the contractor’s experience and financial standing and has concluded that contractor is fit to provide such work.
In many cases, the Obligee will provide the bond form in a package with the contract. It is very important to review this document because not all surety bond forms are the same. The ProSure Group recommends, if possible, to use an AIA A312-2010 Performance Bond. The American Institute of Architects (AIA) collaborated with members from various industry groups including contractors, attorneys, surety bond producers, engineers, and insurance agents to provide this bond form as an industry standard, representing fair and balanced interests for all users.