HOW DOES A CONSTRUCTION BOND WORK?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

It doesn’t matter what type of investment you are making or who you are making it with, the goal is to get a return on the investment. Well, the same exact thing can be said about a construction project.

You want to make sure that the project turns out with the best possible results, and this is where the construction bonds come in handy. These bonds are tailor-made to ensure the customer that his or her project will be completed on time with quality assurance.

During any given construction project there are a number of things that could go wrong. Maybe the contractor is bankrupt. Maybe they finish the job, but just don’t finish it to quality standards. Whatever the situation, a construction surety bond will step in and offer protection.  

TOO LONG; DIDN’T READ (TL;DR)

The construction surety bond is a written guarantee between three parties (surety, principal, and obligee). The surety company provides a guarantee to the obligee that the principal will complete the project as per its outlined terms and within the deadline. If the principal fails to complete the project, the surety company will either have to complete the project or financially compensate the obligee, and they also have the right to sue the principal.

UNDERSTANDING CONSTRUCTION BONDS

Construction bonds are sometimes referred to as contractor bonds, but both are nothing more than financial agreements ensuring the customer that the job will be financially covered regardless of what happens. This pretty much means that the bank or the insurance company backing the bond is guaranteeing the customer that the project will be completed no matter what.

Whether there is a financial disruption or the contractor just is unable to finish the job, this bond will pay to have it finished. This bond can also pay to have the work redone if the contractor initially does shoddy work. That being said, most construction contracts offer some sort of protection in the event that the contractor fails to complete a job.

However, even with construction contracts in place, there are no financial guarantees for the customer. And, this is where the construction bond comes into play. It offers financial protection that is needed to ensure that the job gets done. When a customer or obligee requests a construction bond, they get a financial guarantee that the job will be completed per quality standards in a timely manner.  

To learn more about this in detail, please take a look at what is a construction bond?


UNDERSTANDING HOW THE BONDS WORK

A construction bond is like other types of bonds given that it will require or involve three different parties. These would be the project owner or the obligee, the contractor or the principal, and the insurer or the surety company like Stokes Surety Bonds providing the financial assurance. The principal is the one that purchases the bond and will likely be the contractor or subcontractor.

When it comes to most construction jobs in the United States, it will be required by law for the contractor to have at least a $100,000 bond in place. However, private investors can also request that a contractor provide one of these bonds at any given time. 

When it comes to larger projects these bonds usually come in two different parts. One of the parts acts as overall protection for the completion of the project, while the other part of the bond ensures that all parties involved are paid. It ensures that all subcontractors are paid for as well as all materials are paid for.

Unfortunately, these are not the only types of bonds that a contractor might run into on a given job. There is also what is known as the bid bond. This is a bond that comes into play when there is bidding. Any time a contractor has to bid on a job, he or she will also likely have to take out a bid bond. These bonds work in a similar fashion as the others, ensuring that the contractor is able to follow through with the bid that was made.  

THE BONDS PROCESS

Anytime a contractor has to implement these tools there will be a process. This is usually one that works as follows: the project is first reviewed by the contractor to see if a construction bond is needed. If the bond is needed, the contractor will take out the bond with the surety or insurance company and submit it with the bid. If the contractor wins this bid, they will then approach the surety company and have them implement the bond. The project will then be completed and the bond will be cancelled.



To learn about this in more detail, please take a look at the following links:  

 

•  Obtaining Construction Bonds

•  Obtaining Bid Bonds

•  Turnaround Time for Bid Bonds

•  Obtaining Performance Bonds



However, there is also such a thing as a  maintenance bond that can be used when the project is over. This is another type of bond that just basically protects the customer or obligee after the project has been completed. If required, the maintenance bond kind of acts like a guarantee after the project is complete. It acts sort of like a guarantee, assuring the customer that the job will hold up. Sometimes there are situations where the obligee can require the contractor to purchase and implement these bonds.  

UNDERSTANDING THE OTHER TYPES OF BONDS AVAILABLE

Just like there is a maintenance bond available after the project is completed, there are other bonds that are available during the project. Sometimes these bonds can be required by law, sometimes they can be required by the obligee, and sometimes the contractor will get them without even being required. Whatever the situation, there is no denying that these types of bonds can provide protection to all parties involved.

Although it might not seem like it, the construction bond can protect the obligee as well as the principal and the insurance company. The construction bond ensures the obligee that the job will be completed. It ensures the contractor that they will be able to financially complete the project, and it will ensure the insurance company that if they financially back the bond, they can get reimbursement from the contractor.



All that noted, there are other types of bonds that work in a similar manner. These would be the bid bonds, performance bonds, and payment bonds. 


1. Bid Bonds – Bid bonds are instituted during the bidding process and they protect the investor in the event that the contractor backs out of the bidding or decides that he or she can’t complete the job for the agreed-upon price. If the contractor can’t honor the bid, the next lowest bidder will be awarded the contract. It will then be up to the surety company and the principal to pay the difference. 



To learn more about bid bonds in detail, please take a look at the following links:


•   Meaning of Bid Bonds

•   Purpose of Bid Bonds

•   Bid Bonds in Construction

•   How Does a Bid Bond Work?



2. Performance Bonds – These types of bonds replace the bid bond after the bidding is over. They step in and ensure the obligee that the job will be completed per standards in a timely manner. If the project is not completed in a timely manner or the right materials are not used on the project, the bond will pay to have the situation rectified or the obligee can file a claim against performance bond.

3. Payment Bonds – The last type of bonds that will be available will be what is known as the payments bonds. These types of bonds pretty much ensure that everything is paid. Payment bonds ensure that all the materials get paid for as well as ensuring that all the subcontractors get paid. 

NEED A CONSTRUCTION SURETY BOND FOR A JOB? COUNT ON STOKES SURETY BONDS