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Construction Bonds

Construction Bond

According to data from the Associated General Contractors of America, the construction industry in the US employs more than 7 million people. It produces more than $1 trillion of structure every year. These figures emphasize the importance of this industry – the industry literally builds our nation. And because there is so much at stake, construction companies often need to obtain specialized construction surety bonds.

What is a Construction Bond?

A construction performance bond is a type of surety bond that protects investors in construction projects. The construction bond is designed to shield investors from disruptions or financial loss that could result from the contractor's failure to complete the contract. By submitting a construction bond, the contractor states they can complete the job according to the contract. Also known as "contract bonds," construction bonds help clients and governing organizations have confidence in a contractor's ability to get the job done.

To secure a construction surety bond, the contractor undergoes a qualification process, demonstrating their capabilities and reliability. Typically, the surety company assesses the contractor's financial strength, ability to meet the contract's requirements, and character. By issuing a construction bond, the surety company vouches for the contractor's quality.

If the contractor fails to abide by the contract, the surety company will pay a valid claim against the construction bond, up to the bond's total value. A surety bond is not insurance – the contractor is required to repay the surety company.

Types of Construction Bonds

There are three primary types of construction bonds:

  1. A Bid Bond is essential to ensure a competitive bidding process. It provides that a contractor bidding on a project will enter into a contract with the developer if theirs is the winning bid.
  2. A Performance Bond replaces the bid bond once a contractor accepts the contract and begins work. It guarantees that the contractor will complete the contracted project to a satisfactory standard.
  3. A Payment Bond, also known as a labor and material payment bond, guarantees payment to all subcontractors, laborers, and suppliers involved in a contracted project.

Each of these construction surety bonds involves three parties.

  • The Principal is the contractor purchasing the bond to guarantee either their work (Bid Bonds and Performance Bonds) or their payment to subcontractors (Payment Bonds).
  • The Obligee is the beneficiary party who requires the bond. This is the investor or project owner for the contract.
  • The Surety is the company that underwrites and issues the construction bond.

There are additional types of construction bonds, including subdivision bonds, maintenance bonds, supply bonds, and site improvement bonds. At Viking Bond Service, we will work with you to help you determine the type of construction surety bond you need and answer your questions about the process. Mistakes and misunderstandings only make the bonding process harder, so connect with a team of experts. We will give you the honest, in-depth information you need to ensure your bonding process goes smoothly.

How a Construction Bond Works

As with all types of surety bonds, construction bonds provide certain protections and assurances to project owners and managers that help to ensure the successful completion of the job. Contractors secure construction bonds to guarantee their work when bidding on projects. These bonds are requested by the obligee, which is typically a government entity, although private construction projects also benefit from bonding protection.

In the event of a dispute over payment or performance on a bonded construction project, the surety company must investigate the conflict. The surety investigates to determine the validity of the arguments on both sides. If they determine the principal to be at fault, the surety then awards compensation when appropriate or takes steps to get the project back on track. The principal must repay the surety in full for any money paid out of the construction bond.

Construction bond claims are damaging to the bonded party's business. For one, the principal must repay any money the surety pays out when settling the claim. Repaying a surety due to a settled claim can be a financial blow to a contractor. Also, construction bond claims can render a contractor unbondable. If the contractor has too many successful claims against them requiring payment from the construction bonds, surety companies may refuse to provide new bonding.

It's in the principal's financial interest to avoid actions that could lead to claims. It is also in the principal's best interest to settle with the obligee rather than letting a situation regress to the point of a claim.

What Does a Construction Bond Cover?

A contractor surety bond covers any damages caused by delays, poor construction, or incomplete delivery on the contract. If the contractor, the bond principal, fails to complete the work contracted fully and on time, the project owner can file a claim against the bond. The surety then fully investigates the claim. If the surety finds in favor of the obligee – the project owner – they will pay the damages up to the bond's full value. Then, the principal must repay the surety.

Construction Surety Bond Cost

There are several types of construction surety bonds. Bid bonds and performance bonds are written for the value of the contract. Payment Bonds are written for the expected costs of subcontractors, laborers, and suppliers. The value of a construction bond designates how much the surety company issuing the bond will pay to settle claims. For example, a construction performance bond valued at $250,000 means the surety would pay up to a quarter million dollars to settle claims.

Construction bond costs vary for each contract. They are calculated as a percentage of the full bond value, usually between 1% and 5%. Viking Bond Service, Inc. prioritizes offering the contractor the best provisions at the lowest rate possible.

Request a Construction Performance Bond Quote, Today!

To start the construction bond process, get in touch with one of our surety bond experts at 1-888-2-SURETY (1-888-278-7389). Or request a quote today by completing this easy form. We'll help you find the right surety solution for you. If you have questions along the way, don't hesitate to reach out - it's our commitment to you to provide a superior surety bond experience.

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