Performance Bonds guarantee the performance of a specified contract. When executed, it is attached to the entire contract by reference or exhibit. The bond is in full force and effect until the contract is 100% complete and cannot be canceled. Upon issuance, the bond is made part of the contract, therefore the bond changes if the contract changes.
The surety company will periodically check with the obligee, the job owner (or general contractor in the case of a subcontract), for status on the bonded job. These status checks let the surety know if the job has been completed or how the work has progressed. If the contract has changed, the Obligee will typically mention it, and opens the potential for what is referred to as an “overrun”.
An overrun occurs when the contract amount is increased or the project exceeds the expected completion date for the contract or other changes in scope. Overruns represent additional exposure to the surety backing the bond. When the surety learns of an overrun, the surety will bill the principal for any additional exposure created from the overrun. It is important when the principal is submitting change orders that will increase the contract price, or greatly extend the duration, that an additional bond premium is added to the change order so that this additional premium does not come out of the principal’s profit and overhead. Again, because the bond changes if the contract changes, the bond remains in full force and effect for the duration of the contract, even for the increased exposure of extended duration. This is how contract bonds “extend”, as most traditional contract performance bonds do not renew.
But what happens if a change order decreases the contract price? It works the same way, If the contract price decreases, there might be a return of premium for the portion that was removed from the contract. It is very rare that the premium can be refunded 100%.
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