The Basics of Bonding
Construction bonds, also known as contract bonds, represent a type of surety bond. They provide a financial guarantee that the bills on a construction project will be paid. The issuing insurance company or bank guarantees the project’s completion by a specific contractor. Construction bonds protect the assets of the investor or project owner against shoddy work or non-completion of the project. There are three types of construction bonds: bid bonds, performance bonds and payment bonds.
- Bid Bonds: The bid bond protects the project’s owner if the bid is not honored by the principal, such as a contractor. The owner is the obligee under the bond and has the right to sue the principal and the surety (the issuer of the bond) to enforce the bond. If the principal refuses to honor the bid, the principal and the surety (the insurance company or bank issuer of the bond) are liable for any additional costs incurred in contracting a second time with a replacement contractor.
- Performance Bonds: A contractor, or principal, uses a performance bond to guarantee that it will complete the contract in accordance with its terms. If the principal defaults, the owner may call upon the surety to complete the contract. In such a case, the surety will have to hand the contract to a new contractor or pay the costs for the owner to complete the contract.
- Payment Bonds: A payment bond guarantees all payments that are due to subcontractors and others from the principal. Beneficiaries of a payment bond are the subcontractors and suppliers. The owner benefits from such a bond because it provides a substitute to mechanic’s liens as remedies for non-payment.
Why is Bonding Important?
Any contractor- whether in business for one year or 100, large or small, experienced or novice can experience serious problems. Through the years surety bonds have held fast as s comprehensive and reliable instrument for minimizing risk in the construction industry.
What to Discuss With Your Agent
Before buying Bonding products, be prepared to discuss the following with your independent insurance agent:
- The type of business you operate, and the specific risks that are present in your industry.
- The type of construction project you will be working on.
- The bid amount for the project.
- The bond amount required by the project developer/owner.
- Your revenue, financial statements and personal credit scores.
- Whether you have you been bonded before.
- The Bond Provider’s reputation for customer service and ability to pay claims.
- The responsiveness of the Insurance Agency staff when it comes to generating certificates, processing policy changes, and managing claims.