Do You Really Need a Surety Bond for Your Construction Business? |
Posted: July 5, 2016 |
Many people confuse a surety bond with an insurance. Even though a surety company is generally part of an insurance company, the surety bond is not an insurance policy. Those projects which are privately funded, these bonds are the ones that create a smooth transition from financing the construction to permanent financing and supporting the required support to the contractor and ensuring that the project is accomplished. When it comes to public projects, surety bond support prequalification of contractors, protecting the payment for subcontractors and contract completion protection for the public. A surety bond’s a three-party agreement including the Surety (the bonding company), the Principal (contractor) and the Obligee (owner). The principal promises to do the job in accordance to the contract obligations. A surety bond which is used in construction is called a contract surety bond. Contract surety bonds can be segregated into three categories: 1. Bid Bond - This bond provides financial protection to an obligee if a bidder is awarded a contract which seems compatible to bid documents, but isn’t able to sign the contract and provide necessary performance and payment bonds. The process also lets one screen out incompetent bidders which is a must for competitive bidding. 2. Performance Bond - This bond keeps the obligee protected from the financial loss in the case the contractor is unable to perform the contract as stated in the terms and conditions. In case the owner declares the contractor in default and cancels the contract, it can certainly consider the bonding company to meet the obligations under the bond. 3. Payment Bond - This bond assures that the contractor will make the payment to certain workers, subcontractors and material suppliers. Who requires surety bonds? Public Sector - Statutory Requirement a. Federal Government (protects taxpayer dollars, assures that lowest bidder has the ability to accomplish the project) b. State and Local Governments (necessary payment protection for suppliers and subcontractors) Private Sector - Discretionary Owner Requirement a. Private Owners (Surety assures a competent contractor, provides expertise, experience and assistance in case a contractor fails, the surety deals with and accomplishes the project) b. Lending Institutions (Surety promises that project will be built as per terms and conditions of the contract. c. General Contractors (May express their need for bonds from their subcontractors) Source: Surety Bond Professionals
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