Construction bonds are a risk management tool that is used to protect owners and developers of projects. A bond is a legal guarantee to complete the project as expected. In cases where a contractor can not comply, the bond bond will provide some form of restitution to its owner. Although such bonds are not required for all projects, there are strict bail rules in government work. Many private owners and developers can also ask them to protect the interests of different projects.
There are three types of bonds used in construction; Bid bonds are published during the bidding process and constitute a guarantee that a company will sign a contract for the specified bid price if they are the low bidder. Bonds ensure that the contractor must complete the job in accordance with the contract and if it does not, the compliance guarantee guarantees that money will not be lost by the inclusion of another contractor to complete the work. Payments guarantee that all suppliers and subcontractors will be paid for the work done.
Construction bonds offer a series of benefits to project owners who are often faced with major financial risks A company should be examined thoroughly before the issuance of a bond. By requiring this, the owner receives a guarantee that the company is financially qualified to take on the project and has a solid track record of performance. Complex jobs are more likely to be completed without incidents because of the large economic and legal penalties contracted by contractors due to non compliance.
However, construction bonds have many disadvantages for owners and contractors, since the union bonus may vary from 1 to 2% of the project’s price and this cost is transferred to the owner at the appearance of higher offers. For contractors, such bonds may be difficult. New companies may not have the performance history required to be eligible and those with limited capacity to secure.
Bonds are provided by organizations known as surety companies. When a contractor knows the bidding requirements of a job, he or she will contact an insurance company to arrange a bond. The surety company will evaluate the contractor, as well as the risks associated with the project prior to the determination of the bond rate. Once the contractor pays this premium, a bond certificate is issued, which must be presented with the offer. When the contractor fulfills all the obligations associated with the offer or project, its bond premium is paid.
Due to Miller’s Act at the beginning of the 20th century, payment and performance of construction bonds is a necessity for all government projects that are over US $ 100,000. In 1994, the law was amended to require bonds for all projects worth more than US $ 25,000. The 1994 amendment also specifies that a bond bid must be presented to all jobs requiring payment and performance guarantees. Jobs valued at less than US $ 100,000 should allow contractors to submit a cash deposit in lieu of a guarantee, providing fewer companies with the opportunity to make an offer.