As a contractor, the notion of a claim arising can be a troublesome thought. However, if a claim does arise it is important to know how the process is managed. Here is a basic breakdown of how claims are handled for performance bonds and payment bonds.
Performance Bond Claims:
As you may already know, a performance bond is in place to protect the obligee against financial loss should the principal fail to perform their obligations as outlined in the bonded contract. When a claim is filed, the process of investigating the validity of the claim can be timely and judicious. The surety must collect the necessary information from the obligee and principal in order to come to a decision that is fair to both parties. Cooperation and constant communication between the surety, obligee, and principal are fundamental to quickly resolving a claim.
If they determine that the claim is valid, there are a variety of resolutions they may employ.
The most common resolution is called the “Tender Option”. Under this option, the surety and the obligee agree on a replacement contractor to complete the work. The replacement contractor’s price may exceed the remaining balance of the contract, in which case the surety would pay any overruns.
Another common resolution is called the “Takeover Option”. Here, the surety hires construction professionals to complete the job. They could either hire a construction manager to finish the job using the original subcontractors. Or, more commonly, the surety simply hires a completion contractor. Under the Takeover Option, the surety and obligee usually puts a Takeover Agreement in place, since the surety is taking over responsibility for seeing that the project is completed.
Another option that is more reluctantly considered is for the surety to elect not to be directly involved in the completion work. The surety, of course, is still liable for excess cost beyond the remaining contract balance. However, the obligee would initially finance the completion and seek reimbursement later.
Other resolution options exist, though not as commonly applied. Sometimes the surety and obligee might agree on an upfront cash settlement. Other times they may decide to have the original contractor complete the work under additional monitoring.
Payment Bond Claims:
A payment bond guarantees payment for labor and material used for the bonded contract if the principal defaults. This bond would ensure that the suppliers and subcontractors will be paid. Once again, when a claim is filed, the surety must gather information from both parties in order to make a determination. They may request certain documentation including, but not limited to purchase orders, invoices, payment records, and delivery slips. They may also require the completion of certain forms and affidavits.
If it is determined that the principal has in fact defaulted on payment, the surety would pay the claim and pursue the principal for reimbursement.
The claims process can vary from situation to situation. Sometimes the principal admits that they cannot meet their obligations and a claim can be processed and resolved quickly. However, most times the surety must investigate the claim. Be sure to stay in constant contact with the surety throughout the entire process and provide them any requested documentation promptly. With proper communication by all parties, along with reasonable expectations, a claim should be resolved in a fair and timely manner.