Why Bonds are Crucial for the Construction Industry

Are you thinking about starting a business in the construction and development industry? Have you started to map out exactly what building a business in that industry entails? Is applying for a surety bond on your list of things to do? A lot of people don’t realize the importance of surety bonds in the construction industry, which is why we are going to break it down for you here and guide you through the bond request and application process. While some people may think surety bonds are just an added form of insurance, they are actually 2 separate things and should be treated as such. Surety bonds are a requirement for any construction or development project, so obtaining one for your business is crucial. Find a trusted surety company to not only explain why bonds are crucial for starting a business but also to help you apply and obtain the right bond for your individual needs.

What is the Difference Between Insurance and a Surety Bond?

Any time you are starting a business or growing your business, insurance is required for liability reasons. While sureties are usually part of an insurance company, or have direct partnerships with insurance companies, the two differ. Insurance protects you, the business owner, while a surety bond protects the investor of the construction project against any faulty, incomplete, or unsatisfactory work you and your team provide. The surety bond is more of an agreement or contract that ensures both parties are satisfied by the project scope and final outcome of the project. If something happens to you or a team member while working on a construction project, an insurance claim is filed. If you fail to complete the project to the standards laid out in the contact, the owner of the project can make a claim against your bond to collect financial reimbursement for the project and ensure no monetary loss.

What are Construction Bonds?

Bonds for Construction include:

• Contract bond
• Performance bond
• Bid Bond
• Payment Bond
• Maintenance Bond

These bonds are used as a financial guarantee that the construction project will be completed and all respected parties will be paid accordingly and on schedule for any given project. Construction bonds are necessary to protect the owner of the project, while also proving that the contractor is a trusted party. Obtaining a construction bond is no easy feat, and it requires good work history, good credit, financial stability, and proof that no other claims have been made against previous bonds. As a new business owner, you should make sure that the work you provide will never cause a project owner to make a claim against your bond, this can be detrimental to your business and make it difficult to win bids on future projects. The better the bond history, the more likely you are to win bids on construction projects, which will ultimately help you grow your business.

Types of Construction Bonds Explained

Contract Bond

A contract bond is used as a guarantee to ensure that the contract terms are fulfilled. The contract bond is usually used in conjunction with the performance and/ or payment bond to guarantee that work performance is up to standard and all parties are paid in full. Contract bonds include:

• Bid Bond
• Maintenance Bond
• Payment Bond
• Performance Bond

Contract Bond Requirements Can Include:

• Management Contracts
• Maintenance Agreements
• Completion Orders
• Commercial Services Contracts
• Commercial and Construction Supply Contracts

There are generally 3 parts to the contract bond process; bid bond, performance bond and payment bond. The three parts are used together but are all completely different.

Bid Bond:

• Part of the bidding process
• The contract owner, the obligee, will require that a bid bond be obtained before the bidding process begins
• Guarantees that if the contractor wins the bid, they will be able to fulfill the contract according to the terms of the bid including posting of the performance bond
• Bid bonds range from 5-10% of the full contract bond

Maintenance Bond:

• Maintenance bonds protect the owners of a project and ensures contractors will complete work to the standards outlined in the agreement while following all state regulations and producing work that isn’t shoddy or insufficient
• A maintenance bond will require the contractor of a project to make repairs and fix any shoddy work within a set period of time even after the project is complete
• A maintenance bond ensures that the obligee will not incur any of the costs of defective or shoddy work during a specific period of time because the principal will either make appropriate repairs, or a claim will be filed against the bond so that the project owner is not at a loss

Performance Bond:

• Most federal, state, and local governments require a performance bond for public projects over $150,000 for quality assurance purposes
• The performance bond ensures that the principal provides quality performance of work as agreed to in the initial contract
• Everything from project scope and specifications to the timeline that must be met is laid out in the performance bond contract
• The performance bond can also protect the principal in the case that the contractor goes bankrupt during the project
• Performance bonds are lower than bid bonds usually, costing only 1% of the total project — although credit score, financial status, and bond history will play a role in overall cost and premium rates

Payment Bond:

• A bond that is issued to a contractor for a project that ensures subcontractors, laborers, and material suppliers are paid for the work they do in a timely manner
• Payment bonds ensure that the right people get paid for their work no matter the outcome of the project
• A payment bond is an agreement between the person requesting the bond (usually subcontractors, material suppliers, or laborers) and the principal (usually a contractor) who holds the bond, acknowledging that if payment is not made in a timely manner, the obligee can make a claim on the payment bond and the surety will pay the compensation to appropriate parties
• A payment bond is typically issued with a performance bond after a bid is won and depending on whether it is federal or private, this surety bond is usually required before commencement of a project

Why Bonds are Crucial for the Construction Industry

Now that we know about all of this different contract bonds, it is probably clear to see why bonds are crucial for the construction industry. They are not only meant to protect project owners, but to further justify the workmanship of a contractor. Bonds can be a make it pr break it for business owners. Whether you are in the construction industry, or something completely different, if you own a business there is a high probability that you may need some sort of bond. For any bonding inquiry or needs, feel free to contact our office today!

We are a national surety which means we can write any bond, in any state, for nearly anyone. With specialty programs set in place and relationships with some of the best companies, we have the ability to write bonds when other sureties can’t. Let us be the surety to take your business to the next level.