WHAT IS A CONSTRUCTION BOND?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

As you’ve likely already guessed, the construction bond is a type of bond that is utilized in construction projects. In fact, it is a type of surety bond that protects businesses against specific situations. It protects against business interruptions as well as financial loss due to the contractor’s failure to complete a project.

It also helps when the contractor doesn’t deliver on the services that were promised. Simply put, these bonds are designed to ensure that the construction project’s bills get paid when they need to get paid and who they need to get paid to.  

TOO LONG; DIDN’T READ (TL;DR)

A construction bond is purchased by the contractor to provide security to the obligee (the project owner). This bond ensures that the obligee will be financially compensated if the contractor fails to complete the project upon the agreed terms. In this case, both the surety company and the contractor will be held liable. The most common types of construction bonds available in the market are bid bonds, performance bonds, and payment bonds. 

UNDERSTANDING HOW THE BOND WORKS

Okay, so you know what the bond is. That doesn’t mean you know or understand how does a construction bond work? That’s okay because that’s what you are about to learn. That being said, it is important to note that this bond is also sometimes referred to as the contractor’s license bond. This type of bond will be required for most projects, especially governmental ones, so there is pretty much no getting around it, Understanding what it does, how to use it, and how it can protect your business will be pertinent.

When you are bidding on projects or competing for jobs, you’ll likely be required to put up one of these bonds. The construction bond is more in place to protect the project owner rather than the construction company, and this is why they are usually required. They ensure the customer getting the work done that the work will be done as agreed upon. This might include utilizing specific materials as well as completing a job within a specific time period. This bond will ensure that the construction company does what the contract says they’ll do. 

That being said, it is also pertinent to know that a construction bond comes available in 2 basic parts. This is usually the case with larger projects as opposed to smaller ones, but nonetheless, understanding both parts is integral.

One part is specifically designed to protect against non-payment of materials from suppliers and labor from subcontractors. For instance, if the construction company goes belly up during the project and can’t afford to pay for the rest of the materials to finish the job, this policy will kick in and cover the payment for the rest of the materials. 

The second part is the coverage of the subcontractors. In the same scenario, the contractor that went belly up would not be able to pay subcontractors to finish their part. This is where this bond also provides protection. It’ll also pay subcontractors so that they can finish out their parts of the contract.  

THREE PARTIES INVOLVED

So, you now pretty much know what a construction bond is and what it covers. It basically ensures a project owner that his or her construction project will get finished, regardless of what transpires with the company taking on the job. However, you also need to know that when bonds like this are utilized, there are usually three parties involved.

These parties would be the investors or project owners, the party or parties building the project (the construction company), and the surety company that is willing to back the bond. While there are plenty of surety companies out there like Stokes Surety Bonds, not all of them are willing to back every specific investor or construction company. There will be certain parameters and circumstances that have to be met. 

Just to reiterate a little bit, the project owner or investor is typically a government entity or agency that is hiring a construction company. This would be the individual getting the work done. This party is sometimes referred to as the obligee, and they require the parties doing the work to put up a construction bond, Why? Because it ensures that the project will be completed, regardless of what happens with the company or on the job. Simply put, it ensures that the work will be completed as per the agreement on the contract.

The contractor, usually the individual with the lowest bid, will be the party that put of the bond. This party is sometimes referred to as the principal. When a construction bond like this is taken out, it ensures the obligee that the principal will complete the work according to the contractual agreement. The principal will be providing financial as well as quality assurance that they have the financial means and abilities to finish the job as per the requirements of the contract.  

The last party involved is the surety or the insurance company. This is the party that will be willing to make sure that everything gets done. The legal party that covers the financial or other obligations of the contract in the event that something goes wrong with the principal.  

FILING A CLAIM

Regardless of what you take away from the above, the most important thing you need to know is that both the surety company and principal are held liable in these situations. If something goes wrong and the contractor is not able to finish the job, the blame will fall back on the contractor as well as the insurance company. Moreover, claims can also be filed for bid bonds and performance bonds

In these situations, the owner of the project or the obligee will have to file a claim against the bond. This will compensate them for any financial losses that they might incur along the way. If the contractor ends up going belly up or has to file bankruptcy for some reason, it will be the surety company solely that is responsible for the rest of the financial obligations. They’ll have to pay for the materials as well as the labor required to finish the project.  

UNDERSTANDING THE REQUIREMENTS FOR A BOND 

You can likely already see just how important the construction bond is. Despite this, there are some situations when these bonds aren’t required for work. These situations would be when work is done overseas, when work is done on residential property, when work is done on Indian reserves, and when the projects will take years to complete. In these specific situations, construction bonds are not required.

However, when bonds are required for certain projects, there will be a process to it, The process usually follows something like this – the construction company will review the project to see if a bond is required. 

If a bond is required, the construction company will have to get a quote for the specific bond via the surety or insurance company. If the bidding contractor is awarded the project they will draw up a contract with the surety company.

This will then ensure that the project is completed as agreed upon. Once the work is done a maintenance bond can be taken out just in the ev ent that repairs are needed. Sometimes these are required and sometimes they aren’t.  




To learn more about this in detail for different types of construction bonds, please take a look at the following links:


Obtaining Construction Bonds

Obtaining Bid Bonds

Turnaround Time for Bid Bonds

Obtaining Performance Bonds

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