There are a lot of risks involved when you’re setting up a new company—the product or service might not be well-received; your loans might outgrow your income stream; you might lose suppliers, or worse, fail to meet customers’ expectations.
Regardless of the size of a construction project, there are multiple parties and companies working on it at the same time. These parties include laborers, material suppliers, and sub-contractors among others.
Quality product, paired with unparalleled customer satisfaction, can make any business. One way to keep your customer satisfied is by having their best interests at heart—and surety bonds can help with that.
When applying for a surety bond, a surety agency may ask you (the principal / the contractor) to submit certain financial documentation. The company relies on these documents to determine your financial worthiness.
Bid Bond - A bid bond reassures a project owner that the contractor has a relationship with a surety company. So, if the contractor is a low bidder and enters into the contract, he will be able to provide the required performance and payment bonds.
As the name implies, a contract bond guarantees the performance of a contract. It involves three parties: the project owner (obligee) who enters a contract with the contractor (principal) to fulfill the terms of conditions of the contract. The third party is the surety agency, that issues a contract bond to the contractor.
Also known as a warranty bond, a maintenance bond is used in the construction industry. The bond is designed to reduce risks, protect project owners and ensure that contractors perform quality work. This means that contractors must use quality materials and adhere to fundamental building codes, construction standards and state construction laws until the project is completed. If a contractor fails to do so, the project owner can file a claim against a maintenance bond and receive payment. Maintenance bonds are applicable to public construction projects. In some cases, private project owners may ask contractors to obtain a maintenance bond. These bonds are only valid for a specific time period. They can provide cover to a project owner for a limited time period. This is usually 12, 18 or 24 months. If an issue arises during the specified time period, the project owner can file a claim and seek financial compensation (up to the bond amount). They cannot file claim once the bond is no longer valid.
Primary PartiesBroadly speaking, the primary parties involved include:
- The principal (the contractor who is required to obtain the bond)
- The obligee (the project owner who requires the bond)
- The surety agency that issues the bond.
Evaluating the Cost of a Maintenance BondMaintenance bond cost is a percentage of the bond amount ($50,000 maintenance bond; $500 and $2000 premium). A surety agency considers a number of factors to calculate the amount of the bond. These factors include but are not limited to:
- The amount of coverage required
- The principal’s experience in the construction industry
- The principal’s financial records (financial statements, including income statement, cash flow statement, etc.)
- The principal’s credit score