If you have ever competed for a construction contract offered by a government agency or large business, you were most certainly required to present a construction bond. But what is a bond in construction? Read on to learn about it in depth.
A construction bond is a binding agreement between the contractor (Construction Company), the surety or Bond Company, and the entity or person hiring. It protects the obligee against failure by the principal in fulfilling contractual obligations.
The principal refers to the company or person who purchases the construction bond and is responsible for performing the said task. The obligee is the person or entity protected by the construction bond.
How Does a Construction Bond Work?
Construction bonds are not a recent invention. They have been around for ages. They aim to provide the owner of the contract (government agency or private business) with a guarantee in case the contractor fails to meet its obligation.
When a government agency or large business seeks qualified contractors to undertake projects, they invite different companies to compete by submitting bids. Different contractors will be required to submit bid bonds. The person who wins the contract will be required to purchase a construction bond from an insurance company or other entity that deals in issuing bonds.
The bond provider assesses the contractor to determine their ability to perform the said task. They may look into the contractor’s financial standing, technical abilities, and other aspects such as the contractor’s integrity.
After the insurer determines that the contractor has everything it takes to complete the contract, they can agree on the bond terms.
In large projects, construction bonds are divided into two parts. One part is formulated to cater to the successful completion of the project. The other part may cater to other entities involved in the project, such as suppliers and sub-contractors.
If a contractor performs the task diligently, the bond will expire, and no one will be required to pay penalties.
If a contractor fails to complete the task according to the contract, the contract owner can submit a claim against the construction bond.
3 Types of Construction Bonds
- Bid bonds: contractors who want to bid on government projects or contracts must purchase bid bonds. They help to protect the government agency against unscrupulous bidders. It also ensures that the contractor will not back out of the contract at the last minute.
- Performance bond: It guarantees that the contractor will perform all their obligations as stipulated in the contract. It protects the contract owner (a government agency ) against risks like the contractor going out of business.
- Payment bonds: It is meant to protect different suppliers and service providers involved in a contract. They can submit a claim against this bond if they are not paid.
Now that you know what a bond is in construction, it’s easier for you to get one. Construction bonds are necessary to protect government entities and private businesses against unscrupulous contractors. It also helps contractors to streamline their operations. As a result, they will become more efficient in business. what is a bond in construction