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Types And Benefits Of Construction Surety Bonds

There are various types of risks associated with the construction industry that may impact builders, contractors, investors, project owners, and a number of other stakeholders.

Issues like inflationary pressures, economic downturns, equipment breakdowns, material shortages, etc., can cause the contractor to underperform in any construction project. The contractors may need to postpone or abandon their construction projects when these challenges are impossible to avoid, but such issues can have a significant impact on major construction projects.

Every project owner requires assurance of the project completion, no matter what problem arises. A surety bond such as a construction performance bond or a bid bond ensures that your project will be completed as planned and reduces the risks you might face. This article will help you learn about the types of construction surety bonds and their benefits.

Types Of Surety Bonds

Bid bonds

A bid bond guarantees a contractor’s commitment to take on the work if he is chosen as the winning bidder. Federal law requires them for projects that value $100,000 or more. In case the winning bidder rejects the job offer, the project owner has the option to claim against any costs incurred in seeking new bids and hiring a new contractor.

Performance bonds

A construction performance bond helps keep the project owner’s most significant fear at bay, by guaranteeing that the project will be led to completion by the contractor as per the industrial standards and laws. If some major issue arises and the contractor can’t complete the project, the project owner can file a claim that helps them recoup all the losses and additional costs incurred due to the contractor’s failure to meet their obligations, including the cost of redoing the work through another contractor.

Payment bonds

A payment bond is the most important to workers, suppliers, and subcontractors. When contractors fail to pay their salary, they can file a claim to receive their legal amount.

Benefits Of Surety Bonds

1. Increases Confidence

Fraud is pretty common in the construction sector; therefore, most people fear working with an unfamiliar contractor, especially when a significant amount of money is involved. Surety bonds help boost customers’ confidence in a business by ensuring that they will be able to recover their investment even if something goes south.

2. Helps Avoid Contract Disputes

General contractors and developers sometimes dispute completion percentage, delays caused, or other performance parameters covered by a contract. It may lead to a developer withholding payment. However, if the project is bonded, the surety company can mediate between the two parties and help solve the dispute before it results in unnecessary delays and escalation. 

3. Reduces unqualified competition

An applicant for a surety bond must undergo a rigorous review process to determine their qualification and financial security for their industry. Generally, applicants with poor qualifications or inexperience in their field may find it challenging to obtain the bonds they need for legal operation.

Thus, it reduces unqualified competition in the industry by filtering the non-eligible business owners and contractors at the initial stage.

Conclusion

Construction surety bonds have now become a common requirement for every contractor that works on larger or public projects. These bonds help the project owners, investors, suppliers, etc., by ensuring the project gets completed on time and as promised. In fact, most private companies require contractors to be bonded before they sign a contract with them.

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