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Understanding construction bonds

The world of surety bonding can be an overwhelming place for individuals outside the industry. First, let’s get one of the most common misconceptions out of the way – a surety bond is not the same as an insurance policy. Construction bonds are an agreement, in which the surety guarantees that the contractor, known as the “principal” in the bond, will carry out the “obligation” declared in the bond. Should this fail to happen, then both the surety and the principal will be jointly responsible in terms of liability. Generally speaking, the person to whom the surety and principal owe their obligation to is called the “obligee”, or the person who is the owner. There are 3 types of surety bonds within the construction bond market. They are a bid bond, performance bond and a payment bond.
The bid bond is a guarantee to the owner that the principal will honour their bid and would sign contracts should the contract be awarded to them. The owner may sue the principal/surety to enforce this bond.
The performance bond is the guarantee that certain tasks will be completed in a timely manner. It operates in accordance to the agreement as it was originally made in the contractual documents signed by all parties. Should the principal (the contractor) go out of business during the construction process, it is the liability of the surety to complete the contract as stated. Most performance bonds will give the surety 3 options: completing the contract themselves via a completion contractor (taking up the contract); choosing a new contractor to deal directly with the owner; or allowing the owner to complete the work on their own, with the surety paying the costs.
The payment bond is relates to the payment of money to subcontractors and suppliers. It states that the principal will pay all monies owed to subcontractors and supplies. Both the obligee and the beneficiaries can sue on the bond. A proprietor benefits in a roundabout way from a payment bond in that the subcontractors and suppliers are guaranteed of payment and will carry on with performance.

About the Author

This author offers advice for people looking for their first first contract bonds as it can be difficult, especially for individuals new to the trade, but you can obtain a free bond quote by visiting surety experts JW Surety Bonds.

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