Page 261 - Urban Construction Project Management

216 Chapter Ten
particular city, county, or state. This is especially true in large urban environments. These
are usually of rather small amounts and surety companies write the bonds much more
freely than larger performance and payment bonds. Many of these bonds only guarantee
that the work that is done by the principal is done according to the building codes—not
that the work actually gets done or that suppliers of labor or material are paid.

TYPES OF BONDS

Various types of bonds can be required in a contract to protect the parties in the per-
formance of the work. The different types of bonds are bid bond, performance bond,
payment bond, maintenance bonds, and completion bonds. These bonds are discussed
in the following.

Bid Bonds

Bid bonds are often required by obligees to be presented with other bid documents. This
type of bond guarantees to the obligee who the low bidder is, that they will sign the con-
tract for the project, and will present a performance and payment bond, if required. The
amount of a bid bond’s guarantee is usually 5 to 10% of the amount of the total bid.
This is the bond amount or the potential bond penalty. Usually, surety companies do not
charge for bid bonds. If the contractor was low and awarded the job, but decided not to
enter into the contract, the obligee can make a claim against the bond in order to make
up the difference between that low bidder’s price and the price of the second bidder, or
to be able to put the project up for re-bid.

Performance Bonds
Performance bonds are written for a specific project or contract. They guarantee that the
contractor will perform the contract according to all of the contract documents.
Therefore, the information in the contract documents is what is guaranteed: the com-
pletion time as well as interim completion goals, all of the specifications, any minority
participation, as-built drawings, environmental concerns, the frequency of payments
that the contractor will have to put up with, etc. The surety guarantees that the contrac-
tor will perform. Therefore, if the contractor fails to do so, the surety probably has an
obligation to step in to complete the contract. However, if the principal on the bond has
good reason not to complete the job, such as not getting paid by the obligee or another
breach committed by the obligee, the principal must communicate this to the surety.
Otherwise, the surety will have no choice but to step in and complete the job. Then, the
surety has the right to go against the principal for any expenses the surety incurred in com-
pleting that project. Exhibit 10-4 contains a sample subcontractor performance bond.

Payment Bonds
Payment bonds are written for a specific project or contract. They guarantee that the
CM/GC and subcontractor will pay all those who furnish labor and material for the job.
Payment bonds often guarantee the payment of utility bills as well. Usually, the CM/GC