Understanding Performance Bond Claims Process: A Step-By-Step Guide

A performance bond is a vital safeguard in construction and contracting, ensuring that the principal fulfills their contractual obligations to the obligee. When a project encounters difficulties due to non-performance, delays, or substandard workmanship, the obligee may make a claim against the performance bond.

The Process of Making a Claim

The terms and provisions of the bond and the bonded contract provide the proper procedure for making a performance bond claim. The contract sets forth default and termination requirements and the bond details the procedural claims process.

The most common procedural claim process is as follows:

• 1. Trigger the Surety’s Obligations

When making a claim against the bond, the obligee must trigger the surety’s obligations, such that the surety has a duty to act.  The procedures for triggering the surety’s obligations are specific to the express language and terms of the bond and bonded contract. A stereotypical bond requires the obligee to:

(i) notify the surety that it is considering declaring the principal in default;

(ii) the obligee declares the principal in default and terminates the contract and notifies the surety of the same; and,

(iii) the obligee agrees to pay the contract balance to the surety or completing contractor.

Strict adherence to the bond’s notice requirements are crucial to maintain the obligee’s rights under the bond because failure to do so prejudices the surety’s right to mitigate damages, which may ultimately relieve the surety of its obligations.

• 2. Investigation by the Surety

Once the obligee triggers the surety’s obligations, the surety will perform an investigation to determine whether

(i) the obligee’s claim is valid,

(ii) the obligee fulfilled its duties under the bonded contract, and

(iii) there are any defenses that may excuse the surety’s liability.

• 3. Surety Options

The bond identifies the performance options availability to the surety. The most common are to takeover, tender, finance, issue payment, or deny liability.

1. Takeover – Perform and complete with another contractor with the surety remaining involved until project completion. The surety will pay the difference between the remaining contract balance and the cost to complete.
2. Tender – The surety bids out the work, enters into a contract with a new contractor, and gives the contract to the obligee. The surety does not remain on the project, but does pay the difference between the remaining contract balance and the cost to complete.
3. Finance – With the permission of the obligee, the contractor completes the project. The surety will remain involved in the project and will pay the difference between the remaining contract balance and the cost to complete.
4. Buyout – The surety pays the difference between the remaining contract balance and the cost to complete.
5. Decline Performance – The surety denies liability and will not perform.

For guidance on performance bond claims, contract enforcement, or navigating surety obligations, contact a construction and commercial litigation attorney at MWH Law Group. Our team has the experience to protect your project interests and resolve disputes with practical, strategic solutions.