“How can I miss you if you don’t go away?”
Performance Bonds are issued by insurance companies – but they are not insurance policies. When you get to the end of your auto insurance, it will expire if not renewed. Plus, the company can cancel it in the middle of the year. Boom, it’s done! Insurance policies are not “forever.” Click for mood music!
The fact is, people focus on getting surety bonds because they are a mandatory element of many transactions, but they think little of getting rid of the bond – eventually. Let’s go over why you want to close out a performance bond, and how to do it.
Every performance bond is married to a written contract that is identified in the first part of the bond. They are married until death – until the contract is completed. If you have a two year contract covered by a Performance and Payment Bond, you have a two year bond, unless the contract is extended. If the contract is amended to a term of 25 months, the bond automatically follows. If the contract dollar amount is increased, the bond automatically follows. The point of the bond is to guarantee the Obligee’s (the beneficiary of the bond) satisfaction with the performance of the contract. So the bond remains in force until the obligee / contract owner accepts the completed contract.
To close out the surety’s obligation, a release or acceptance of the contract by the obligee is needed. The applicant / principal (contractor) can’t cancel or close the bond. Only the obligee can end it.
Closing evidence can consist of a Status Inquiry form completed by the obligee. The questions would be:
If the project IS completed:
Completion date: ___________ Acceptance date: _____________ Final contract amount: $___________
If the project IS NOT completed:
Approximate percentage or dollar amount completed: $_____________________________
Describe any disputes or performance issues on the project: _______________________________
Do you know of any unpaid bills for labor or materials? ____ No ____ Yes If Yes, please describe: _____________________
Current estimated completion date: ____________________________________
Now that we know how to close out a performance bond, why bother to do it? There are some very good reasons…
- The surety (bonding company) will conclude the liability on their books when the bond is released.
- They also immediately earn all the remaining premium. Two good reasons!
The Contractor / Principal
- That portion of the company’s bonding capacity will be restored to support a new contract. This helps them qualify for more projects and larger ones. That is the source of their company revenues.
- The “acceptance” of the work, by the obligee, is the official conclusion of the contract. It ends the principal’s obligation – except for a “tail” such as a maintenance obligation.
- When completed, the project is added to the company’s credentials. They can now list the contract as a successfully completed job. That’s how their resume is built.
- The applicant company, it’s owners and spouses have a legal liability that arises through the indemnity agreement (a hold harmless issued to protect the surety.) It is literally a liability which must be disclosed on their financial statements. When the bonds are released, this company and personal liability ends.
The Bonding Agent
- The agent wins too because more bonds can be issued. And that’s how they make their living.
Everybody wins when the job is closed out and the bond gets released. This is a necessary process that should not be ignored.
FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it! Call us with your next one.
Steve Golia: 856-304-7348
For more cool bond stuff follow this BLOG in the upper right corner!