The performance bond protects the owner from the contractor’s failure to complete the contract in accordance with the contract documents by indicating that a financially responsible party stands behind the contractor to the limit of the penal amount of the bond. Most performance bonds will accordingly require such a guarantee for 100 percent of the amount of the contract price. The entity protected is usually only the named obligee (the owner), with such protection not usually extending to third parties.
The Miller Act of 1969 requires performance bonds on all government projects. For other projects of significant size, it is much more than just a good idea for the owner.
The performance bond, however:
1. Does not provide any guarantee that the contract work will be completed as specified for the contract price.
2. Limits the surety’s liability to a specific dollar amount—the cost to complete the work. This will not normally include consequential damages.
3. Can be discharged if the owner permits a cardinal change in the contract. A cardinal change is one that fundamentally alters the scope of contract performance.
4. May be discharged if the owner violates contract terms that are prejudicial to the surety. Failing to provide builder’s risk insurance, for example, may be such a violation.
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