The Expert Podcast

so what happens if a bonded party to a contract fails to perform under that contract. here's a perfect example a contracted surety principal who did not fulfill their obligation this is a pretty big deal. this is a contract for twelve million dollars for constructing a bridge in North Carolina. and as part of any major contract most municipalities require surety bond on the behalf of the construction company. and about halfway through this project the construction company the stop working they could follow through. and according to the article the contractor defaulted on this contract North Carolina department of transportation said it terminated its contract over several issues including failure to resolve payment and failure to provide sufficient labor and equipment to fulfill the contract. what happens is when that occurs they completed a fifty five percent and they were paid seven point one million the DOT requires contractors to have a bonding company in case the agency is forced to terminate the contractor's work. in this instance the bonding company is now responsible for that project and no construction activity will occur until the new contractor is hired. and this is how a construction surety bond works. there are three parties to that surety bond there's the surety itself which is the company the insurance company that issues the bond there's the obligee who is the client in this case it was the North Carolina department of transportation and the principal is the construction company. and the way upon works is the obligee requires that the principal the bidder of the contract obtains the surety bond in order to be considered to be the winning bidder. once the project has started that surety bond it goes in place to guarantee that the project will be finished. and the surety now has to step in into the shoes of the principal and get that project finished by hiring another contractor another company to finish it. but that's not the end of the story
the surely the insurance company will then take any losses they incur by having to pay to finish this project and they will subrogate against the principal meeting that just because you have a bond that you provided to your client doesn't mean you're off the hook if you don't follow through. the project gets finished the client gets made whole by the surety the new construction company will finish it but then when all the dust is settled that the insurance company that surety that provided the bonds will now go back to the principal and recover any losses from them. the reason for the surety bond is to make sure that there is deep pockets for the client to get the project finished so they're not going to lose out so if this contractor just walked away from this project after getting paid seven million and then finish it at the North Carolina DOT had to come out of pocket to finish it themself in a costume another ten million or fifty million or whatever it is. then they would be out the difference between the original bid which was 12.3 million and what they end up having the pay. so this makes sure that their budget is it here to the surety eats the difference but then they go after the principal. they may never be able to collect from the principal. there may be no money to recover no assets they may go bankrupt but they surety is taking on that risk not the client in this case the government agency. so if your construction company make sure you understand that if your client has to execute the surety first of all you're not the hook. you may have liability to the surety plus you may not be able to get another bond in the future. if you are an obligee meaning that your recipient of these benefits then surety is going to make sure that your project will be completed to the specifications of the original terms and conditions. any surety bond issued from a licensed surety agency our license surety provider is going to cover all that. they're going to have the financial resources to make sure your project gets finished which is the reason why bid bonds are project bonds are are very good. there's also another instance where this might come into play if the project was completed but it wasn't completed to contract specifications or there was some deficiency or defective construction the surety will also cover that if it's written correctly. so be aware that construction bonds or surety bonds for construction projects are benefit all the parties so that everybody knows that there is the deep financial backing for all the commitments being made to ensure that first of all the principal gets paid but second of all that the obligee has a project that meets the terms and conditions of the original contract.