Players in the construction industry rely on risk allocation to
keep the industry functioning. As Covid-19 has reminded us, the
world is full of uncertainty; even carefully planned,
well-organized projects can be derailed by insolvencies, poor
performance, inclement weather, breakdowns in the supply chain, or
global pandemics.
For owners, a performance bond is an effective hedge against the
negative consequences of unpredictable risks; in fact, on larger
projects, owners may require that a general contractor procure a
performance bond from a surety as a condition of being awarded the
project. Under a performance bond, the owner typically assumes the
role of "Obligee" and the general contractor assumes the
role of "Principal". If a general contractor defaults
under the contract, a performance bond enables the owner to call on
the surety to complete the project. The surety can complete the
project using one of three options:
