Most construction contractors know the process of obtaining a performance and payment bond, but they may not be aware of the legal relationships. The contractor is the (principal) and the owner is the (Obligee) in most of the guarantees that come from the bonding companies. Most lawyer’s that work with contractors are aware of the rights of the obligee and that of the principal but still lack the knowledge and experience about the process of obtaining a bond. Lets try to see if we can explain how and when a bond is needed on federal,state and private projects.
A surety bond is not an insurance policy. A surety bond is a guarantee, in which a bonding company guarantees the contractor (principal)that he will perform his obligation that he is required to do because of what the contract so states.
When you give a bid bond that just means that the principal a long with the bonding company is going to honor you bid. The performance bond is stating the the principal will complete the project as stated in the contract. The payment bond is to pay the suppliers and materials as well as the subcontractors. After all the conditions of the bond have been preformed then the bond conditions usually are void. If the bond does not state that condition then it will stay in full force.
If the contractors fails to perform the conditions of the contract then both the contractor and the bonding company are jointly liable for the conditions of the contract. Both parties can be sued and either party is responsible for the entire contract plus penalty. If you have penalties for late days this could be above and beyond the amount of the bonds issued.
If you are general contractor then the obligee is the owner of the contract and you are the principal. If your are a subcontractor then the obligee might be the general contractor. The people or firms who are entitled to sue on the bond ,sometimes called beneficiaries of the bond and are usually defined in the bond conditions in those states and federal statutes that require bonds. To make it more clear is that they will name who can sued for not performance.
In summary if you get the bid bond in on time and your are the low bidder you may have a chance to get the job. The owner always has the right to choose who he wants to do the bond even if he choose the next bid.
The performance and payment bond need just tell someone that the bonding will step in an finish the job if the contractor does not, This give them security that need to have the job completed.