Tuesday, April 24, 2012

Performance Bonds or Financial Guarantees of Performance in Construction Contracts.

In the event of a breach of a contract by a contractor where the contractor fails to complete the work or abandons the work, the prime remedy a buyer has is to claim breach and pursue damages for the “cost of cover”. In construction that is the cost of having another contractor come in and complete the work.

When you require a performance bonds or financial performance guarantee you may not need to go to court to recover your damages. If there breach of performance you make a claim against the
bond issuer or guarantor. The bond issuer or guarantor can contract the work out and pay to have it completed if it may be completed within the cost of the bond or guarantee. If the cost of completion is more that that amount, they would simply pay the amount of the bond or guarantee to the buyer. At that point the buyer who would then be able to contract to have the work completed.

The collecting on the bond or guarantee doesn't excuse the original contractor. If there is additional cost over what you recovered under the bond or guarantee, you can then exercise your remedy under law directly against the contractor to collect any remaining damages to complete the work so you may recover your full "costs of cover".

The real advantage of having a performance bond or financial performance guarantee is instead of having to invest your money to complete the work and then wait for the recovery of damages that you may never collect, the response from the bond issuer or guarantor is immediate. The one disadvantage is bonds or third party guarantees add to your cost of construction. The second disadvantage is you now are dealing with a party whose sole goal is to minimize their costs.

If you deal with a high quality supplier that has significant assets it may make sense to not require a performance bond or guarantee as there is a high probability they will complete the work as they know if they don’t, they will be liable for the additional costs of re-procurement, any liquidated damages and that is likely to be more than what it would cost them to complete the work. If you deal with a contractor or supplier that isn’t as financially stable or a joint-venture company that was formed to do the work and may have limited assets on its own, you probably should require a performance bond or require that the two companies that make up the joint provide a form of parent guarantee in proportion to their share in the joint-venture company. Unless you have a parent or company guarantee, in determining whether a subsidiary of a company is financially stable, you can only look to the assets of that subsidiary.

1 comment:

  1. Thank you for sharing this article to us. When you are in a construction business, make sure that you take care the contract of your contractors to avoid any problem like breach of contract. Give them some benefits in order to avoid breaching there contracts.