The following was penned by Danielle Rodabaugh of www.SuretyBonds.com.
New contractors have a plethora of regulations to learn about in a short time, and oftentimes they’re left to sort through them on their own. The use of surety bonds in the construction industry is one such regulation. There are many things every contractor should understand about surety bonds in the construction industry, but here are the five most crucial.
1) Government agencies require different surety bond types to protect consumer interests.
The basic idea behind contractor bonding is to protect project owners from financial loss due to a contractor’s inability to complete a project and/or follow industry regulations. Contract bond requirements help regulate the industry, reduce fraud and keep financially unstable contractors out of the market.
Although there are a number of specific surety bond types out there, government agencies typically make use of three major ones when it comes to the construction industry.
- Bid bonds guarantee a contractor won’t increase the initial price of the bid submitted to the project owner. If a contractor should try to raise the price of the bid later on, then the project owner can make a claim on the bond.
- Payment bonds guarantee a contractor will pay for all materials and subcontractors used on a project. If a material or labor provider should remain unpaid after a project is completed, the business can make a claim on the bond to gain reparation.
- Performance bonds guarantee a certain quality of work will be completed. If a contractor should fail to meet a contract’s stipulations such as deadlines, then the project owner can make a claim on the bond to recover losses.
2) Contractor bonds should not be confused with insurance policies.
Although surety bonds are categorized as a type of insurance, contractors should understand that contract bonds and insurance policies are two entirely different products. The two are essentially different in that insurance policies generally protect policyholders (i.e. contractors) whereas surety bonds generally protect the bond’s obligee, which is typically the project owner. As noted earlier, though, payment bonds protect contractors who have been subcontracted by a prime contractor.
3) Contractor bonds act as legally binding contracts.
Each contractor bond that’s issued legally binds together three parties.
- A contractor purchases a surety bond as a guarantee that work on a project will be performed according to the project’s contract.
- An obligee requires a surety bond to protect the investments made in a project. A government agency such as a state’s contractor licensing board often acts as the bond’s obligee.
- A surety executes the bond by providing a financial guarantee of the contractor’s ability to complete work on the project.
4) Contractors undergo a thorough background check before they can get surety bonds.
Before contractors can purchase a surety bond, they must go through an application process. The exact process will vary depending on the surety provider, but it oftentimes includes a review of the applicant’s credit score and other financial records. Contractors with poor credit usually pay a significantly higher price for their bonds because sureties take a greater risk in backing the work of a financially unstable principal.
5) Contractors should look for the surety that will best serve their needs.
As with any major purchase, the decision to buy a surety bond should be carefully researched. Contractors should always verify the reputation of any surety provider they plan to work with. The agency should be able to explain all material clearly while also being well-versed in local, state and national market conditions, as laws and regulations change frequently. Experienced surety specialists have a thorough knowledge of the industry and also provide great service to their clients.
This article was provided by SuretyBonds.com, a nationwide surety bond producer that aims to help contractors understand the legal aspects of surety bonds and the bonding process.
You can reach Danielle at darodabaught@suretybonds.com.