To understand what a construction bond is, one needs to have a clear idea about surety bonds. It is because it is a type of surety bond used primarily by investors in construction projects. The documentation protects investors from potential financial disruptions or losses caused due to a failure to deliver the project as specified by the contractor.
Therefore, it can be said that the construction bond is like an assurance to the investor that if something goes unplanned, the construction project’s bills will be paid. Bonding Basics for Contractors are essential to know beforehand to avoid complications later.
The goal of this article is to educate readers on the most essential things about these bonds.
The Different Parties To The Construction Bond
Usually, there are three parties involved in these bonds:
● The Principal: It is the person/entity/company that purchases the bond. Usually, it is the general contractor or the subcontractor.
● The Bond Company: A trustworthy company is needed to provide the bond for the project. The company will be responsible for paying claims against the financial losses of the investor.
● The Obligee: It is the person, entity, or company who will get the payment if they face financial losses caused due to a problem in the project. It must be remembered that the obligee varies from one bond type to another.
While for a payment bond, the obligee is the subcontractor or supplier, it is the investor or property owner for performance bonds.
Construction Bond - How Does It Work?
It is more like an insurance policy, only slightly different. Here, contractors purchase the bond to safeguard themselves and the project owner/investor from financial damages, specifically losses. The bond ensures that in case of any problem, the owner/investor can do the necessary so that the bond company pays the owner the expenses caused due to the problem.
So, does that mean an insurance policy is the same as a bond claim? No, preferably.
That is because when the bond company pays the project owner against his filed claims, the contractor needs to pay the surety back. This surety will be fixed with the contractor beforehand, where there has to be a viable payment plan accepted by the company.
Bonds In Public And Private Projects
If you are wondering whether bonds for public projects are the same as private ones, then yes is the answer.
So, bonds are necessary for all federal projects over $100,000. At minimum, payment and performance bonds are mandatory for all projects. Depending on individual regulations of different states and local public entities, there might be additional changes.
In simple terms, project owners or investors have the right to ask their contractors for surety bonds for the project. On acceptance, the expenses are added to the contract price. That is because it is an additional requirement placed on the owner’s behalf.
Construction Bonds Conclusion
If owners demand additional protection from unprecedented financial damages, these construction bonds come into play. Bonding Basics for Contractors are essential for all parties to clearly understand how the documentation works, what things are covered under it, and what is not.
Therefore, it is crucial for project owners or investors to have this additional protection. Especially those using public money for a project should definitely consider it. While payment and performance bonds are the most common, there is more to the list.
