Surety Obligations for Performance and Payment Bonds in Contractor Default

In summary, the conversation discusses a contractor who furnished a performance bond and a payment bond with a total value of $200,000 for a contract worth $1,000,000. The contractor completed 60% of the work and received $540,000 from the owner, but then defaulted, leaving unpaid bills of $120,000. The owner hired another contractor to finish the job for $475,000 and the question is whether the surety for the bonds must pay anything to the owner and if so, how much and why. It is suggested that the surety may have to pay a total of $215,000 to the owner.
  • #1
bobbarkernar
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A contractor furnished a performance bond having a face value of $100,000 and a payment bond of $100,000. The contract price was a lump sum of $1,000,000. The contractor had completed 60 percent of the work and had been paid $540,000 by the owner. Then the contractor defaulted, leaving unpaid bills to workmen and suppliers of $120,000. The owner engaged another contractor to finish the job for $475,000. Does the surety for the performance and payment bonds have to pay anything to the owner? If so, how much, and why?



What I thought was that the Surety would need to pay the full $100,000 of the performance and the full $100,000 of the payment bonds. However I am not sure if the surety would also be required to pay the difference between the new contractor finishing cost of $475,000 and the $460,000 finishing cost of the first contractor.
All together what I am thinking is that the surety would have to pay $215,000 to the owner.
 
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  • #2
Why the hell are you asking this in a physics forum? Go contact a local claims lawyer for matters like this, don't post them in the Engineering Systems and Design section.
 
  • #3
This is an engineering question. Mainly pertaining to a design and build engineering project. (Fictional construction project)
 
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Related to Surety Obligations for Performance and Payment Bonds in Contractor Default

1. What are performance and payment bonds?

Performance and payment bonds are a type of surety bond that is often required in construction projects. They serve as a guarantee that the contractor will fulfill their obligations under the contract and will pay subcontractors, suppliers, and laborers for their work.

2. Who needs to obtain performance and payment bonds?

Typically, the contractor or bidder of a construction project is required to obtain performance and payment bonds. However, some project owners may also require subcontractors to obtain these bonds depending on the size and complexity of the project.

3. How much do performance and payment bonds cost?

The cost of performance and payment bonds varies depending on the size of the project and the financial stability of the contractor. Generally, the cost is a percentage of the contract value, typically ranging from 1% to 3%.

4. What happens if a contractor fails to fulfill their obligations under the bond?

If a contractor fails to fulfill their obligations under the bond, the surety company will step in and provide compensation to the project owner or affected parties. The contractor is then responsible for reimbursing the surety company for the amount paid out.

5. Are performance and payment bonds required by law?

Performance and payment bonds are not required by law, but they are often required by project owners as a way to mitigate risks and ensure the completion of the project. Some states may have specific bonding requirements for public projects, so it's important to check local laws and regulations.

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