What is a Construction Bond?
‘Construction Bond’ is a type of surety bond used by investors to protect themselves against adverse events that may cause failure to complete the project or disruptions. The builder may fail to complete projects due to inability to meet contract specification or insolvency.
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It is a three party issue, the builder, the owners/investors and the surety company backing the bond.
Any serious investors or a contractor must ask themselves “What is a ‘Construction Bond’” in the sense that it is a mandatory pre condition of any project. They must grapple with its implications as well as the advantages.
Besides, the complexity of any project will determine whether parties need to protect themselves against overall job completion, protection against the cost of materials from subcontractors and suppliers
Bonds are necessary prerequisites of any project as many things could go wrong in a massive construction project. Thus it is of paramount importance that projects of particular sizes like government and public works acquire construction bonds.
Construction Bond Types
The following are the most common construction bonds;
Bid Bond – A bid bond is a guarantee that assures the project owner you are capable of undertaking the project after selection in the bidding process. The project owner is more than comfortable to award the project based on the presence of a bid bond knowing fully well that they will collect compensation from the construction surety bond.
Performance bond – A performance bond protects the owner if the contractor fails to perform, or protects the owner from losses emanating from poor performance, or is unable to deliver the project as obligated in the contract. Moreover, in other circumstances, the contractor may declare himself bankrupt hence the surety is responsible for compensating the owner for any loss incurred.
Payment Bond – A payment bond is a three-way contract that brings together the owner, the contractor and the surety firm into an agreement that all subcontractors, material suppliers, and laborers will be paid making the project lien free. This bond is rare and its billed at 50% of the regular premium.
Maintenance Bond – This is a special Bond that gives warranty after project completion in cases of defective materials, poor artistry, and just like warranties, its time bound. If a project is found defective within the prescribed period, the owner receives the bond amount for repairs or replacement of defective parts.
Subdivision Bond – A Subdivision bond is acquired for new projects by some local governments when a contractor starts working on a subdivision of a building project. It ensures that the contractor will complete structures within the subdivisions like electrical upgrades, sidewalks maintenance, drain water systems, sewer systems according to specification and within the stated timeline. Failure on the part of a contractor triggers the bond payment to complete remaining works.
Site improvement bond – A site improvement bond is acquired by contractors when undertaking improvement on a current site rather than on a new building. Moreover, the bond will compensate victims of fraud on the part of the contractor. It shares similarity to subdivision bond however subdivision bonds are for new buildings.
Contractor license Bond (CLB) – CLB or permit bond is a construction surety bond that serves the purpose of all parties involved in a contractor project. This Bond assists all parties involved in case of an unethical business decision. It protects the contractor, the owner/investors of a project and the bond issuing firm. A contractor must purchase a contractor license bond to qualify for the contractor licenses at city, county and state level. If one of the parties is affected by wrong decisions, they can file against the bond for financial compensation.
Supplier bonds – Supply bond guarantees the supplier will be able to meet his obligation of supplying materials as prescribed in the purchase orders. If a supplier reneges the agreement, then the Bond is released to compensate the purchaser for the losses incurred.
The Miller Act: Payment and Performance Bond Requirements
The Miller act is a federal Act that requires every contractor bidding for a government project to post a payment bond and a performance bond covering all material and labor. These bonds must are for federal projects worth $100,000 or more. The Federal Acquisition Regulation is empowered to request additional bonds for contracts worth $25,000 and $100,000.
Now that we have answered this burning question, ‘What is a ‘Construction Bond’, it is important to note that construction of buildings and other structures is a costly undertaking. Thus, make the construction industry less risky by acquiring construction bonds. Remain financially independent, stay in your financial comfort zone, don’t be afraid to make mistakes, don’t lose your credibility, but dominate the sphere of construction bonds. Create confidence and trust for all parties involved by acquiring construction bonds.
Why NFP Surety
We have been bonding businesses such as yours since 1984! We know how to properly get you bonded, to keep you protected, and get the construction project rolling. Fill out our free online application today, and let us support you any way we can.