AEC definitions
A performance bond is a three-party guarantee. The surety promises the owner that the contractor will perform the contract. If the contractor defaults, the surety must complete the work, find a new contractor, or pay the owner's loss, up to the bond's penal sum. It does not insure the building against fire. That is builder's risk.
Definition
The owner is the obligee, the contractor is the principal, and the surety is the guarantor. Public work often requires the bond by statute, including the Miller Act on federal projects and state equivalents. Private owners require it when the contract says so. A claim has to follow the bond form: declare a default, terminate if the form requires termination, and give the surety the chance to respond. Calling a delay a default without following the contract wastes the bond. The premium is a project cost, usually from the contractor, priced in the bid.
In depth
The owner must follow the default and termination clauses. A surety asked to act before a proper default may refuse. Notice addresses in the bond matter.
The surety's options are in the bond form. Owners who start completing the work themselves, without giving the surety its election, can weaken the claim.
A bond for 100 percent of the contract price does not pay unlimited overruns plus every consequence. The form states what is covered. Delay damages may be inside or outside that promise. Read it.
Increases in the contract sum should increase the bond if the form or the statute requires. A change order the surety never consented to can be a coverage argument. Follow the bond's change language.
The performance bond protects the owner against default. The payment bond protects subcontractors and suppliers against nonpayment. Owners need both for different risks. A bidder who prices only one has not met a typical public requirement.
Claims procedures differ. A subcontractor's payment-bond claim is not an owner's performance-bond claim.
The annual or project premium buys the guarantee. It is not a fund sitting in an account the owner can draw like contingency. Underwriting looks at the contractor's capacity. A bond is not available to every bidder on every size of job.
Bid bonds, performance bonds, and payment bonds are three instruments. The bid bond gets you to award. The others are delivered after.
On a small, well-known contractor, an owner may trade the premium for other security. On a project the owner cannot finish out of pocket, the bond is the backstop.
The general conditions should match that choice, including the timing of delivery before notice to proceed.
Examples
A public owner declares default after the notice and cure period. The surety elects to tender a completion contractor. The penal sum caps the surety's exposure.
A fire loss goes to builder's risk. The performance bond is not the claim, because the contractor has not defaulted.
The contract sum grows by change orders. The bond rider increases the penal sum as the form requires.
FAQ
Unlock the value of your institutional knowledge—organized, connected, and grounded in your team's critical workflows with Nomic.
