In the present economic climate, performance bonds are often important for construction projects, for several reasons: (1) although construction manager/contractor defaults have always been of concern (public agencies routinely require bonds), such defaults have increased recently with the worsening economy; (2) owners, developers, sureties, construction managers and contractors need to protect their interests to the maximum extent possible; and (3) such bonds enhance the viability of construction projects generally. The latter is true because it is important to make sureties as secure as possible, or else they won’t issue bonds, thereby drying up what little construction is in—or about to enter—the pipeline.
There are several basic concepts in the performance bond context: First, the relationship here is a tripartite one, not the normal one-on-one contractual relationship found in owner-construction manager/contractor, or construction manager/trade contractor agreements. Here, the three parties are (1) the construction manager or contractor (the principal), (2) the surety, and (3) the project owner (the obligee). Each side’s rights are interdependent, but the surety is a powerless bystander for virtually the entire duration of the construction project. The latter is injected into the process only when the project owner has formally declared a default.
Default and Surety’s Options
