Understanding the process helps contractors avoid it and respond correctly if it happens.
In this article
When it starts
An owner declares the contractor in default and notifies the surety under the bond terms.
Notice
Follow the bond's notice requirements.
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Investigation
The surety reviews the contract, schedule and payments.
Options
Financing the contractor, takeover or tendering a new contractor.
Indemnity
Owners of the contractor often sign personal indemnity.
Costs
Losses can be recovered from the contractor.
Communication
Work with the surety early.
Prevention
Strong cash flow and honest reporting.
Where to start
Read your general indemnity agreement with an attorney.
Common mistakes
Hiding problems from the surety, ignoring notices and personal guarantees without understanding them.
An example
A contractor in financial trouble called its surety early instead of waiting for a default notice. The surety helped finance completion, and the contractor kept its relationship.
What to track
Track backlog, cash flow, overbillings and underbillings, and any project with growing losses.
Questions to ask
Does our surety know about problem jobs? Who signed the indemnity agreement? How much cash do we have if a project goes wrong?
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Frequently asked questions
What happens to the contractor after a performance bond claim?
The surety may seek reimbursement under the indemnity agreement, and future bonding capacity can be reduced or lost.