Performance Bond Question
I have a question on performance bonds. Imagine the construction cost for a building is 800K and the owner has already paid the contractor 200k. Then the contractor goes bankrupt, and the new contract construction cost is 1M (due to poor construction and inflation). How much money will the surety pay the owner now?
Thanks for your help.
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My guess is that the Contractor had an 800k policy for the penal sum at contract execution and therefor the surety will pay up to that amount to finish the project. Anything above that is the owners responsibility. I suppose the Owner can turn around and file a claim against the Contractor for the remaining 200k to make them whole. I will let others chime in - don't want to steer you wrong.
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check out sections 5.3 and 7 of the AIA 312.
In summary, 5.3 it states that the surety is responsible for the additional costs incurred 'in excess of the balance of the contract price incurred by the owner as a result of the contractor default'
section 7 goes on to say the surety is obligated for 'the responsibilities of the contractor for correction of defective work and completion of the construction contract'
So in this case I think the surety pays for the completion of the project. However, this question is worded weird. Is there 1M worth of work left to do? Or is the total contract sum adjusted to 1M, meaning there is $800k of work left to do? I would guess the second option.
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