Investors use a construction bond, a type of surety bond, in construction projects. A surety bond is the financial guarantor of a construction bond. It guarantees to the obligee that the contractors will follow the terms outlined by the bond and allows for the protection against disruptions or financial loss from the failure of a contractor to complete a project or to meet project specifications. Learn what the requirements are for construction bonding.
How a Construction Bond Works
Known as a contractor license bond, a construction bond is required for a construction project. When contractors do work on government or public works projects, they are required to have construction bonds. Construction bonds can come in two parts of you have a large project: one to protect against an incomplete construction project, and the other to protect against material nonpayment from suppliers and subcontractor labor.
Three parties are typically involved in a construction bond:
- The Obligee (investor/project owners)
- The party/parties building the project
- The surety company backing the bond
It’s usually the project owner or investor in a government agency that lists a contractual job it desires. To decrease the risk of a financial loss, the obligee requires that all contractors put up a bond. The contractor with the lowest bid price is typically selected for the job since investors expect to pay the smallest amount possible for a contract.
Requirements for Construction Bonds
The process for acquiring construction bonds is as follows:
- Checking job requirements to see if a contract or construction bond is needed
- Obtaining a bid bond from the surety agent and submitting that with the proposal
- If awarded a contract, contact the agent for a performance bond
- Completing the project
- If required, getting a maintenance bond once the job is complete for any repairs
Any jobs a contractor does overseas or on Indian reservations, projects for private home remodeling, or a multi-year construction one, doesn’t receive construction bonds. However, in the U.S., most government jobs require a construction bond, but for companies, some lines of work may not qualify for them—even if the government posts them. Also, many surety companies consider some projects too risky to insure.
Rules, regulations, and laws that differ internationally or on native reservations, can cause problems for the surety company if the contractor doesn’t complete the job or violates the terms of a contract.
Types of Construction Bonds
There are three types of construction bonds to consider; they include a bid bond, performance, and payment bond. A contractor needs a bid bond for the competitive process of bidding. A performance then replaces a bid none when the contractor accepts a bid and then begins work on a project. Last, the payment bond is the guarantee the contractor has the money to pay workers, subcontractors, and material suppliers.
Contact Post Insurance
To learn more about construction bonding, we invite you to contact us. We can consult with you on what type of insurance coverage you need. Our insurance agency has thirty years of experience, creating an environment of trust and excellent customer service. Call us today.