How Performance Bonds Protect You from Perilous Kids (and Contractors)

As we end the month of drizzly April showers, flowers begin to make a reappearance and the dreaded season of lawn mowing begins. Thankfully, young neighborhood kids will seize this opportunity to make a few dollars, knocking on doors to offer their lawn mowing services as soon as the first few blades of grass sprout. Glad to spend your Saturday afternoon watching sports instead of sweating outside, you hand a kid twenty bucks and kick back in your recliner. It seems like the perfect set-up, until you glance out the window and see the oblivious kid mow down your mailbox and take off running. Now not only are you out the $20, but you have to pay to fix your mailbox as well as hire another kid to finish mowing the yard.

While losing a few dollars can put a serious dent in your mood, having a contractor default on a multi-million dollar construction project will really ruin your day. Unlike seedy neighborhood kids, though, contractors are required by the government to obtain bonds which protect clients against just such a situation.

More specifically, a performance bond is required to guarantee that the winning bidder on a project has the means to complete a project and agrees to do so in accordance with all applicable laws and regulations. Any public project with a contract in excess of $100,000 will require a performance bond as well as other contracting bonds.

The bonds are written by independent agencies and backed by insurance carriers (sureties) or banks who guarantee the work of the contractor. If all projects are completed on time and in full, the surety’s involvement in the construction will be fairly limited. However, if the contractor suddenly runs out of money halfway through the project or causes collateral damage to surrounding property, the client can file a claim with the surety to declare a default.

Following a default, the surety can choose to complete the contract itself through a completion contractor, select a new contractor to finish the job, or reimburse the client for finishing the work themselves. Whichever option is chosen, the surety provides capital to ensure the original contract is fulfilled. After this point, the surety will turn around and force the defaulted contractor to repay whatever sum was granted to the client.

Had the lawn-mowing kid been bonded, you could have easily filed a claim with the surety agency for your $20 and the cost of a new mailbox. But for now you’ll have to resort to calling his parents.