Construction business is a risky one in terms of financial security and liabilities in case the project is not completed. The risk of contractors not completing the work or the risk of workers damaging the owner property and the materials is always there and the owner does need protection and security against these. There are multiple stakeholders involved in the project ranging from the designers, architects to construction estimating companies and the owner has to deal with them all hence, financial security is required for the owner. Luckily, there exist construction bonds that help in securing the owners interest as well as help the contractor. These provide financial security and quality assurance while the project is in the construction phase by providing compensation from surety agents and companies. Even after the completion, certain types of bond secure the dealings of the owner and the contractor. In this piece, we are going to highlight that why it is important to have a construction bond for building process and how can it help the owner.
So let us get started.
What is a construction bond?
IN order to draw a complete understanding of the benefits of the construction bond, it is important to understand what actually a construction bond is.
It can be summarized as the assurance by the contractor that he will complete the work on time. Hence, it works as an insurance against the disruptions and financial losses. Construction bonds cover two major aspects of a project that include the Completion of the project and the payment for materials and labor and the liabilities occur if a contractor fails to comply with these.
Parties that are Involve in the construction bond are:
- Owner of the project
- Surety Company
- Party for construction
Types of construction bonds:
There are some common types of construction bonds.
The contending contractor submits it along with the bid for the bidding process. It is seen as a guarantee that the contractor is capable of implementing and completing the project.
Bid bond offers relief in terms of compensation if the project fails.
A bid bond becomes a performance bond as soon as the owner accepts the bid and the construction work is started. It works as a protection for owner in case the contractor does not deliver the project or the quality of the project is not good as under the provisions stated in the contract.
As the title depicts, a payment bond is concerned with the entire matters related to the payment for materials and labor. It is seen as an assurance from the contractor’s side that he can manage and cover the monetary matters related to his workers and subcontractors.
This bond is acquire after the completion of construction work. This is for any type of repair work that will be required after the project completion. This act as a security for any kind of damage that occurs.
All the types of construction bonds indicate that it is important to have construction bonds and surety companies to secure your project against the financial disruptions and damages.
How does it work?
It is a stated principle that the job has to be done according to the contractual policies in terms of quality as well as the finances. Hence, the bond is there to reduce the likelihood of financial losses if the job is done according to the contractual policies or the terms laid out in the contract.
Therefore, if the contractor fails to abide by these policies and principles, liabilities occur under which the contractor has to compensate all the losses to the owner. In case, the contractor declares bankruptcy or is out of finances, Surety companies compensate the financial losses on behalf of the contractor. These companies can then sue the contractor for the amount paid only if it is permissible under the bond conditions. Hence, it provide the necessary insurance.
Steps to follow for construction bonds:
Now since we have laid out the importance of the construction estimating services and bonds for you, it is of equal importance to make you aware of the process through which bonds are acquired.
- First, the need for construction bond is checked by reviewing the requirements for the building process.
- After a careful assessment of the requirements, a bid bond is formulated by the surety agent that has to be submitted for the bidding process along with the written proposal.
- In case the project is allocated, acquiring the performance bond is the next step in the process. Moreover, on completion of the project, a maintenance bond is required in case there arise any need for repair work.
It is important to have a knowledge of the bond process in order to be aware of the security and assurance that these bonds provide. Both the owners and the contractors must have the complete knowledge of principles that are laid out if a bond is formulated and must act accordingly.
The process of construction is a lengthy and risky one that involves dealing with a number of stakeholders and investing time, efforts and money in the project. The owner is required to get careful estimations for the project in terms of both cost and time. Choosing the contractors for the project is also challenging. The construction bonds ease the job to some extent and provide the insurance that they are looking for. Under these bonds, they can have contractors working for them who are reliable to some extent and have submitted statements that they will complete the construction work and in case of failure to meet these requirements and timelines, they will be liable to paying compensation for the losses. It is a great relief for the owners who have important investments in the project. These bonds make it easy for the owners to deal with the parties. They have to deal with the designers and architects for the matters related to designs. They deal with the cost estimators for having construction estimating services and work accordingly. Given these budget estimations, construction bonds make their work easy to some extent, as they know that they can claim liabilities in case of failure.