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Reading The Fine Print In Performance Bonds

By Expert Author: Mac Johnson

How does that bond do that? It acts as a guarantee to the project owner, that if the contractor fails to complete the project, as per the specifications in the contract, owing to monetary or any other constraints, the project owner will be compensated for all monetary losses arising out of such a situation. However, loss will be covered only up to the amount of the performance bond.

At the time of making the performance bond, the costs and consequences are well calculated and hence, normally the amount of the performance bond more than meets the amount of the losses that the project owner has incurred.

A performance bond has often lulled project owners into a false sense of complacency and they feel that if anything were to go wrong, at least their money was safe. But it is not so - they would be well advised to read the fine print on the bond, before they put their faith in the contractor.

A recent court case, pertaining to a performance bond is a pointer to why you should read the fine print carefully. The owner of a Connecticut Condo development went to court, invoking a performance bond, to try and get payment as work on his condo construction was stalled many a times and finally stopped. On the face of it, he seemed fully justified and entitled to collect the payment.

However, the lawyer for the surety company argued that there were several conditions on the performance bond, that were required to be met by the owner and which he failed to meet, which contributed to the unsuccessful completion of the condo construction. The judge ruled in favor of the surety company and the contractor.

A performance bond is not something that you just take to court, tell them that the contractor has defaulted and they will give you the money. The sureties will fight tooth and nail to ensure that they don't have to pay: they will first challenge the prime contention and say that there has been no default and the amount of work completed is the amount that was contracted for.

When that fails, as it most likely will, they will say that the owner failed to make payments on time, owing to which the project was inadvertently delayed and prices shot up, making it difficult for the contractor to meet his contractual obligations.

During the building of any project, there are always some alterations and modifications along the way, mostly minor, and some of them are actually suggested and proposed by the contractor who has practical experience of such things. All these changes have been made in good faith and with mutual consent - yet the sureties will now say that the owner made material changes to the contract, nullifying the performance deed.

Last but not the least, they will ask for summaries of all payments made, copies of change orders and reasons in writing why the owner feels that the contractor is in default of the contract.

Mind you, there is a lot of information hidden in the fine print. Contracts can be tricky. Read them thoroughly and avoid the headaches and situations like the Connecticut Condo owner found himself in. It's your money at risk, so never take chances.

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