How Surety Bonds Protect Those Involved in Construction Projects
Surety bonds are necessary to provide financial security and construction project completion by assuring project owners that contractors that they hire will perform the work as well as pay their suppliers of goods and services. This particular bond is used as a way to transfer risk where the surety company assures the project owner (obligee) that the contractor (Principal) will perform a contract in accordance with the contract documents.
Types of bonds available through a surety company
There are three basic types of contract surety bonds:
- The bid bond assures that the bid has been submitted in good faith and that the contractor will enter into the contract at the price bid and will provide the required performance and payment bonds.
- The performance bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
- The payment bond assures that the contractor will pay specified subcontractors, laborers, and any material suppliers on the project.
By analyzing the risks involved with a construction project, the obligee will be able to better understand how surety bonds can protect against those risks. Owners, lenders, taxpayers, contractors, and subcontractors are protected because the contractor has undergone a rigorous prequalification process and is judged capable of fulfilling the obligations of the contract.
Contractors are more likely to complete bonded projects than non-bonded projects since the surety company may require personal or corporate indemnity from the contractor. Subcontractors have no need to file mechanic’s liens on a private project when a payment bond is in place, and the payment bond may be the only protection these claimants have if they are not paid for the goods and services they provide.
Bonding capacity is a vital tool because securing one can increase a contractor’s or subcontractor’s project opportunities, and put them in a better position to win projects they have bid on. The surety bond producer and underwriter can also offer technical, financial, or management assistance to a contractor.
Any contractor, whether just starting out, or having been in business for several years, large or small, with varying levels of knowledge, can all experience serious problems when performing this type of work. Through the years surety bonds have been instrumental as a reliable instrument for minimizing the risks in construction.