The importance of surety bonds
Surety bonds provide
reimbursement to an individual, company or the government if
a firm fails to
complete a contract. Surety bonds act as a protective shield in the
event of
uncertainties in the construction world.
It is important to make the correct choice to mitigate and manage risk on
construction projects and to select the most fiscally responsible option to
ensure that
your project is completed in a timely manner. These criteria are of
paramount
importance to a successful project - and a successful business.
It would be
economically damaging to gamble on a contractor or subcontractor whose
level of
commitment is questionable or who could reach the brink of bankruptcy half
way
through the job.
To offset such an
event, surety bonds provide the most satisfactory solution:
providing financial
security and construction assurance by assuring project
owners that
contractors will do the work and pay specified subcontractors, laborers
and
material suppliers.
What is a surety bond?
A surety bond is a
three-party agreement where the surety company assures the
owner (obligee) that
the contractor (principal) will fulfill a contract. Surety bonds
used
in
construction are known as contract surety bonds.
Surety is designed to
prevent loss. Basically, the surety pre-qualifies the contractor
based on
financial ability and construction expertise. The bond is underwritten
with
little expectation of loss, hence, the premium is primarily a fee for
pre-qualification
services.
The three primary
types of contract surety bonds are:
1.
Bid bond
2. Performance bond
3. Payment bond
Bid Bond
Bid bond provides
financial assurance that the bid has been submitted in good
faith and that the
contractor intends to enter the contract at the price bid and
provide the
required performance and payment bonds.
Performance Bond
The performance bond
protects the owner from financial loss in the event the
contractor fails to
perform the contract in accordance with the specified terms and
conditions.
Payment Bond
Payment bond provides
the assurance that the contractor will pay certain workers,
subcontractors
and material suppliers.
Protect yourself
against losses
Construction is a
risky business and if the appropriate measures are not taken,
then, project
owners are at risk of suffering huge losses in uncertain conditions.
Surety bonds provide
the assurance that the contractor has the capability to finish
the contract
within the budget, on time and according to specifications. The owner
has the
peace of mind that a good risk transfer mechanism is in place with surety
bonds.
Then, the burden of
construction risk is shifted from the owner to the surety
company.
