Construction Bond Definition
Construction bonds also known as “construction surety bonds” or “contract bond”s are a deal that construction project creditors sign ensuring insurance in case of unfortunate events occurrence which can lead to disruptions, inability to complete the project, failure to meet project requirements, inability to pay their debts; is the contractor’s business. Bonding with construction is a risk management tool used to protect the owners and developers of projects. The bond is a legal guarantee that the project will finish as planned. In situations where a bonded contractor fails to perform as stated, the bonding firm will provide the owner with some form of restitution.
A Little More on What is a Construction Bond
A construction bond is defined as a contract among at least three parties. They include:
- The main party, who is the contractor or the building company.
- The assurance, or the safeguarding firm.
- An obligee, the party needing bonding, or the likely owner of the comprehensive project.
The obligee’s protection in those bonds would give the obligee a contractual promise that the contractor would meet the terms of the bond.There is a fixed amount of money protection will have to pay in case of a default. While bonds are not needed on all projects, government work is subject to strict bonding requirements. Many private owners and developers may often need bonds to protect their interests on different projects.
Sureties and Construction Bond Types
Bid bond: This bond is obligated to protect the owner of a project if the bid is not honoured by the contractor. It is the bond owner, who is obliged under this bond and has the privilege of sueing the contractor and the guarantee (the issuer of the bond) for the execution of the bond.
Performance bond: A contractor, or principal, uses this bond to ensure that the contract is completed in accordance with its terms. If the principal defaults, the owner may call on the guarantor to finish the contract.
Payment bond: A payment bond covers all payments which are due from the principal to subcontractors and others.
Advantages of using a Construction Bond
- By means of a construction bond, the guarantor agrees to uphold the contractual promises (obligations) made by the principal for the benefit of the obligee if the principal fails to fulfill his promises to the obligor.
- In the case of a claim, the surety will investigate it. If it turns out to be a valid claim, the security will pay and then turn to the principal to refund the amount paid on the claim and any legal fees incurred.
- In other cases, contract bonds may exist to ensure, for example, the proper performance of fiduciary duties by individuals in positions of private or public confidence.