Why do I need a performance bond from my contractor?

At a church board meeting recently, the trustees were considering the final proposal for a major expansion of church facilities. After many months of working with the architect, the plans were finished and the architect presented them with the bidding documents. One of the trustees questioned why the bidding documents contained a requirement that the contractor provide a performance bond. Why do we need that; will this just add to the cost of the project when we will pick a good contractor anyway?

The protection offered by a performance bond

Any construction, especially major construction, is a risky investment with a great deal riding on the performance of the general contractor. A performance bond is essentially an insurance policy issued by a third party guaranteeing that the contractor will finish the job in accordance with the terms of the contract and in a workmanlike manner. The cost of a performance bond is borne by the contractor and depends on a number of factors-the contractor's creditworthiness and experience, the cost of the project itself and the type of construction. That cost is inevitably factored into the contractor's bid and so the cost is ultimately paid by the owner. The cost can range anywhere from 1 percent to 5 percent of the cost of construction. While contactor horror stories rarely make the news, they do happen. And they happen frequently.

One such story was a contract for the installation of a new roof on an elementary school in Milwaukee. The price was almost $400,000 and the contractor was required to post a performance bond. The new roof was completed and was guaranteed for five years. The roof did not last two years before it began leaking. Ultimately a lawsuit was initiated and the bonding company was made a party. The court in Milwaukee Board of School Directors v. BITEC, Inc. found that the bonding company was liable for the cost of repairing the defective roof, even though the construction had been completed; the bond incorporated the terms of the contract but contained no time limitation.

In Washington, the City of Montesano contracted for paving work. There immediately were problems with the quality of the contractor's work, including a one-inch dip at the very start of the street project. The contractor refused to do any modification work without additional compensation. Fortunately the contractor had posted a performance bond, and after fruitless negotiations, the bond was invoked to make good on the contract.

Requiring a performance bond may put some smaller or newer contractors at a disadvantage since they may not have the requisite history to qualify for bonding or a smaller company may simply not be willing to undertake the extra time and effort it would take to secure a bond. There are a number of alternatives to a performance bond in such a case-cash or a certificate of deposit based on a percentage of the bid price may be put up by the contractor to guarantee the project.

Seeking an attorney's assistance

If you have questions about whether requiring a contractor to post a performance bond is appropriate for your project, or whether the bond is adequate, you should seek the advice of a Southern California attorney experienced in construction law. Certainly you should seek such advice if a contractor does not perform contact work in a workmanlike manner or walks away from a project before completion, regardless of whether a performance bond was part of the contract.

Let Law Offices of John R. Lobherr, Inc., in Irvine, California help you regarding your performance bond questions. Contact our law firm by calling 949-751-6389.