How Surety Bonds Work In Construction [infographic]

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How Surety Bonds Work in Construction

For construction projects, surety bonds are often required by municipal agencies and instill confidence in your company. Let’s take a closer look at how they work.

What is a Surety Bond?

Surety bonds involve three parties:

  • The principal (the construction company/contractor)
  • The obligee (the municipal agency)
  • The surety company

 

How it works:

1. The principal promises to perform their work as contracted by the obligee.

2. If a construction company fails to meet their contractual obligation for a project, the public or the government agency can file a claim to the surety company.

3. The surety company settles the claim with a financial sum or assigns a new contractor to take over the project.

4. The original contractor is responsible for the amount paid on the claim.

Types of Construction Surety Bonds

Bid bond

  • Necessary for the bidding process
  • Protects obligee if contractor is awarded bid but fails to sign contract or provide required bonds
  • Weeds out unqualified construction project bidders

 

Payment bond

  • Ensures workers, subcontractors, and material suppliers receive payment from contractor

 

Performance bond

  • Protects taxpayers from financial loss should contractor fail to perform duties in accordance with contract terms and conditions

Why a Surety Bond is required?

  • Protect the general public
  • Ensure project completion
  • Ensure payment for all workers and subcontractors
  • Create easy transition from financing construction to permanent financing
  • Allow for prequalification of contractors

What You Need to Apply for a Construction Surety Bond

  • Contract bond application
  • Copy of contract (portion that pertains to the insurance and bonding requirements)
  • Bond form
  • Financial statements
    *Larger contracts require more documentation

To learn more or to apply for a construction surety bond today, visit PerformanceSuretyBonds.com

 

 

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