Surety bonds are a part of everyday life. Many individuals don’t understand the concept of bonds and how they are used to protect parties entering into a contract with one another. In basic terms a surety bonds are a binding legal agreement that offer financial guarantees to the parties involved in a multitude of contracts. Surety bonds state that one party, known as the surety is obligated to a second party, the obligee , in case of a default by the third party, the principal.
Contract surety bonds offer both financial security and construction assurance on projects both building and construction. Contract surety bonds assure the project owner that the contractor will meet the requirements set forth in the contract. If the contractor fails the project owner the surety company will cover the contract requirements so that the project owner is not at risk of loss. The surety offers a guarantee that the contractor will perform the job stated while meeting their financial obligations to subcontractors, material providers and employees.
Bid bonds ensure that a contractor submits a bid that is intended to meet the needs of the contract. The price of the bid that is submitted covers the financial obligations of performing the work as stated in the contract while covering the expenses on their end.
Performance bonds ensure the project owner is covered from loss if the contractor fails to perform the contract as stated and agreed upon.
Payment bonds are in place to make sure that the contractor is liable for the expenses to subcontractors, laborers and materials related to the contract that was entered into.
Maintenance bonds protect project owners against defects in materials or workmanship for a specific, agreed upon period of time.
Subdivision bonds ensure cities, counties and states that the principal, contractor of a subdivision, will financially cover and construct improvements within the sub like streets, sidewalks, curbs, street gutters, and more to make sure the sub meets stated requirements.
License and permit bonds are obtained to allow certain businesses to do business. An example of these bonds include: construction bonds, motor vehicle bonds, employment agency bonds and more.
Fiduciary bonds secure that administrators, executors, guardians and such will perform duties in line with court stated orders.
Different bonds are used in special situations to guarantee that contracts or duties are performed as contracted. Many people confuse insurance and bond however they are completely different. Insurance is used to protect individuals or businesses from themselves or others where as bonds are used to make sure expectations are met by others. Both protect against loss of finances.
Contractor License Bond: Purchasing a contractor license bond is almost always a requirement of contractors before they are licensed to work on construction projects. Depending on the laws within the state, county, city or even subdivision a contractor license bond could be required. Without the necessary contractor license bond in place the contractors often cannot obtain the license that is needed to provide construction services.
If work is performed and a contractor does not have a contractor license bond or it has expired they will feel the impact in the form of penalties, fines, licenses being revoked and even legal action. Contractors are wise not to perform any construction work until they have their contract license bond in place. The expense of not having this in place could sink a contractor before they even have the chance to get their business started.
Bid Bond: Construction projects do not all require bid bonds. They are often asked for by project owners when a contractor is bidding out a project. Financial proposals are submitted to project owners to provide a cost basis for the project. Before a contract is entered the bid and contract terms need to be agreed upon. Many project owners will not award the construction contract to contractors that fail to have a bid bond accompanying the contract.
A bid bond guarantees a contractor is entering into a contract for the amount of the original bid if the contract is awarded to them. Surety bonds ensure contracts are filled to the terms of the contract that is entered into. If a contract is awarded the surety bid bond guarantees the contractor will fulfill the contract at the amount originally billed.
Payment Bond: Any contractor seeking contracts that exceed one hundred thousand dollars are required under the Federal Miller Act to provide project owners with both a payment and performance bond. This includes any publicly funded projects when they include alterations or repairs to buildings that cost over one hundred thousand dollars as well.
A payment bond is a bond that ensures a contractor will cover the cost of materials and the payroll of sub-contractors. The payment bond keeps the project owner from being liable from any costs if the contractor cannot pay. The payment bond puts the ultimate liability on the surety company issuing the payment bond.
Performance Bond: Performance bonds are often paired with payment bonds as both protect project owners from loss sustained by contractors failing to meet their obligations. The performance bond offers a certainty to project owners that the project will be completed at the level of performance that is stated within the contract the contractor and the project owner agree upon.
Contract bonds are a type of surety bond that contractors are issued by surety companies to guarantee project owners are covered from any inadequacy on the contractor’s part. Each type of surety has criteria that must be met before a contractor’s eligibility can be determined for construction bonds. Criteria such as the contractor’s skill level, resources, ability to perform and historical criteria have been met. Surety companies analyze the applicants, contractors, overall financial status, work history, standings in financing and credit report before the surety bonds can be issued.
Looking for a professional contractor for commercial or residential construction projects can be all consuming. There are steps that need to be followed to ensure that the contractor you are hiring can meet the performance expectations while staying on time and within budget. In order to evaluate the contractor’s ability to accomplish this you must take time to look into their background.
Looking into a contractor’s background can consist of several things including reference checks, viewing portfolios and analyzing online reviews.
Reference Checks: As you narrow down contractors to work with it is imperative to ask to speak to both recent commercial and residential clients. These clients will revile what you can expect when working with the contractor. This will give you an idea of where you should align your expectations should you choose to work with them.
Portfolio Viewing: There are many ways in which a contractor can show off their portfolio. A great way contractors can visually show who they are is through an online forum such as an up-to-date website rich in photos of projects. Websites that offer images of projects from start to finish can often be the most helpful to individuals looking to hire a contractor. If you want a closer look at projects completed by the contractor ask them to view a job they are currently working on or have recently finished.
Online Review Analysis: Getting to know a company is made simpler with internet review forums. Read reviews from individuals reviewing contractors that have worked on projects similar to the one that you are looking to hire them from. People are completely honest, maybe even too much so when it comes to online reviews. It is a great place to get to know a contractor through their client’s eyes.
Although evaluating a remodeler’s background offers a great deal of insight to the hiring process it doesn’t offer a complete picture. When selecting a contractor for construction endeavors it is critical to the success of the project to confirm that all individuals, including sub-contractors, are licensed, insured and bonded.
It is essential that any contractor that is hired for any residential or commercial project not only be licensed and insured but also bonded. A variety of construction bonds are offered to ensure that all aspects of a project are covered. Below is a list of bonds that secure the project owners interest in a project from a contractors default.
Contractor License Bond: A contract license bond includes three different parties including the obligee, the principal and the surety. This type of bond is secured as a promise that the surety (bonding company) makes to pay the obligee (project owner) if the principal (contractor) is unable to fulfill the contract as stated.
Bid Bond: When a contractor is bidding on a project a bid bond is required especially on government projects. A bid bond is used to inform the owner of the project that the contractor can secure a bond if they are the lowest bidder. It states that the bid amount covers the financial liabilities of the project. It ensures that contractors don’t low ball a bid in order to get the job only then to ask the project owner for additional funds as the project progresses.
Performance Bond: A performance bond is used to guarantee that a project is completed. It ensures that the job is performed as stated within the contract and that it is completed within the time frame that is expected.
Payment Bond: Usually a payment bond is issued in conjunction with a performance bond. Contractors post payment bonds to ensure that the subcontractors and material suppliers that are working on the project will be paid.