Assurance of Surety Bonds in Construction

Making the correct choice to manage risk on construction projects and selecting the most responsible option to guarantee timely project completion are vital to a successful project. Gambling on a contractor whose level of commitment is not certain or who could become bankrupt halfway through the job can be a devastating decision. Surety bonds offer optimal solution by providing monetary security by assuring project owners that contractors will execute the work and pay specified subcontractors and laborers.

1. There are three main types of contract surety bonds. The bid bond gives monetary assurance that the bid has been submitted in good trust and the contractor enter the contract at the price bid and provide the required presentation and payment bonds. The performance bond protects the possessor from financial loss when contractor fails to perform the contract in agreement with its terms. The payment bond sees that the contractor pays workers, subcontractors, and materials suppliers.

2. Many surety companies are subsidiaries of insurance companies, and both surety bonds and usual insurance policies are risk mechanisms regulated by state insurance department. Surety is intended to prevent loss. Since the bond is underwritten with minute expectation of loss, the premium is mainly a fee for prequalification services.

3. Construction is a very risky business. Surety bonds offer guarantee that the contractor is able of completing the contract on time, within the budget, and according to terms. Specifying bonds not only decrease the likelihood of default, but, the owner has the peace of mind that the burden of construction risk is moved from the owner to the surety company.

4. Surety bond premium differ from one surety to another. Usually, there is no direct charge for a bid bond. In various cases, performance bonds integrate payment bonds and maintenance bonds.

5. The surety company’s prequalification of the contractor will protect the project proprietor and offer assurance to lender, architect, and each one involved with the project that the contractor is capable to render the project’s plans into a finished project. prior to issuing a bond, the surety company should be fully satisfied, among criteria, that the contractor has:
• good reputation;
• The ability to face current and future obligations.
• to experience matching the contract requirements;
• Necessary equipment to do the work or ability to obtain it.

6. When bonds are specified in the documents, it is the contractor’s duty to obtain them. Contractor usually includes the bond premium sum in the bid and the premium is payable upon execution of the bond. Once analyzing the risks involved with a building project, consider how these bonds protect against those risks. Owners, lenders, contractors, taxpayers and subcontractors are protected because:
• Contractors will more likely complete bonded projects than non-bonded one since the surety company may need personal or corporate indemnity from the contractor.
• Subcontractors need not have to file mechanics’ liens on personal projects when a payment bond is in place.
• The surety company will fulfill the contract in the occasion of contractor default.

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