Surety Bonds

A surety bond is an arrangement among three parties: the surety (generally an insurance firm), the contractor, and the owner, which bind them together so that the contractor will meet all of their covenants in their contract. If the contractor defaults, the surety pays the owner or performs the work and will pursue the contractor for reimbursements. Learn more about how surety bonds work and their benefits.

Types of Surety Bonds

  1. Bid Bonds – Guarantee that a contractor will honor a bid. If a contractor backs out from bidding, the surety pays for the difference in the costs or rebidding expenses.
  2. Performance Bonds – Guarantees the performance of the contract. In case the contractor defaults, the surety takes up the job or gives payment to the owner.
  3. Payment Bonds – This type of surety bond assures that subcontractors and suppliers get paid; hence, no liens can be placed on the owner assets.
  4. Warranty Bonds – It guarantees the contractor to keep warranty obligations under it typically for one to two years after project completion.

How Surety Bonds Protect Owners

Surety bonds provide relative security to the owner from financial losses. They are also means of reducing risk in the construction process.

  1. Pre-qualification Process – Contractors are already screened through financial and experience evaluation processes conducted by the surety. Only the qualified will therefore be hired.
  2. Performance Guarantee – If the contractor defaults, the surety will either perform the project or compensate the owner.
  3. Silent Services – Sureties do assist to prevent contractor defaults from taking place by either financial or management support without the direct connection or involvement of the Owner.
  4. Cost Effectiveness – Surety bonds are very cheap. Performance bonds are only about 0.5%-3% of a given contract amount, and bid bonds are even free of charge in most instances.

How Surety Bonds Guarantee Construction Project Success

Surety bonds offer the strongest layer of protection during the entire construction process- from the bidding phase through to project completion. They minimize the financial risk against possible default by the contractor and give the owner some protection against defaults and financial disputes.

 

Surety Bonds Costs and Procedure Understanding

  1. Contractor’s Role in Obtaining Bonds

Actually, the contract obtained for surety bonds is basically the contract between contractor and owner. They are the ones entitled to the benefit of the bond’s protection in most cases, but most contractors pay for the bond, with the costs typically added into overall contract costs.

  1. Constant Evaluation

Surety companies evaluate contractors on an ongoing basis to verify that they are carrying out obligations. Thus, continuing monitoring reduces the risks posed to the owner as it ensures that only credible contractors are allowed to work during construction.

Miscellaneous Bond Types: AIA Contract Documents

AIA Contract Documents provide numerous industry standard bond forms, that are intended to benefit both owners and contractors.

Conclusion: Protections with Surety Bonds into Your Construction Project

The incorporation of surety bonds into your construction project may well be the most effective way to limit risks, but it will also help ensure contract fulfillment and provide protection over financial interests.