Moorestown Construction Law Attorneys
Performance bonding is a common practice in the construction industry. In general, performance bonding is intended to provide a company, homeowner, or contractor who hires a contractor (or subcontractor) with a measure of financial protection in the event a construction project isn’t completed according to the terms agreed to. In this way, a performance bond acts as a guarantee to ensure a contractor (or subcontractor) will complete a project on time, within budget, and according to the plans agreed to.
Performance Bonds in New Jersey – Who Issues Them?
In most cases, performance bonds are issued by a surety company licensed by New Jersey. In the event a contractor is unable to finish a construction project, the surety company will undertake action to ensure work is completed and, as much as is possible, according to the original timetable agreed to. In this way, performance bonds provide a measure of insurance for those hiring a construction company should a contractor be unable to finish a project due to any number of issues.
However, in the vast majority of cases, surety companies almost never have to take over a construction project. The reason for this is a function of the extensive financial, background, and performance check surety companies undertake in regard to contractors before issuing a performance bond. In this way, performance bonding amounts to a thorough vetting of contractors: those that pass the background check have a proven track record of competence and excellence.
In fact, most of the costs associated with performance bonds are a direct result of how much money surety companies must expend in order to conduct a thorough investigation of a construction company.
Breach of Contract and Performance Bonds
So, what happens when a contractor stops work or refuses to continue? Does the surety company step in? While it’s highly unlikely that a contractor that passes a surety company’s investigation will default on a contract, it’s important to remember what performance bonds actually cover. First, surety companies will not act as an arbitrator between a contractor and the party that hires them. If there are legal issues surrounding terms of the original contract, hiring a construction law attorney will likely be necessary.
However, if a contractor fails to comply with certain conditions in the original contract, stops or abandons work on a project, or violates contractual terms governing the payment of subcontractors and suppliers, he can be considered in default. As such, assuming the hiring partying has not breached the original contract, the surety company can be notified and asked to take over the project. However, if the surety company believes the breach can be repaired, both parties will be instructed to work together in order to salvage the construction project.
Default and Performance Bonds
In the event of a default, the surety company must be formally notified according to the procedures specified in the original contract regarding performance bonding. Here, it’s important to point out that most contractors ask the hiring partying to pay for the cost of a performance bond. If a contractor doesn’t ask for the cost up front, it’s likely the cost has been included in the contract itself. As such, the hiring partying is paying for the performance bond and has every right to expect that the surety company will honor the requirements of the bond in the event it’s necessary to declare default on the party of a contractor.
If you have questions regarding performance bonds and construction contracts, contact Moorestown construction law attorneys at LaVan Law today.
