A contract surety bond guarantees performance of a contract per its terms and conditions. The project owner or general contractor referred to as the “obligee” enters a contract with the principal or contractor to fulfill a contract, the contractor then secures a surety bond from a third party corporate surety company. In the event that the contractor defaults, the surety company is required to either hire a cure contractor to complete the contract or reimburse the project owner for any financial loss sustained. Be advised that the claims process is a slow one and a claim will prevent a contractor from being able to secure bonds on future jobs.
There are several types of surety bonds:
Bid Bond: A bid bond is essentially a prequalification tool reassuring the project owner that the contractor has a relationship with a surety company and therefore they can feel comfortable that if the contractor is low bidder and enters into the contract, he will be able to provide the required performance and payment bonds.
Payment Bond: Payment bonds or Statutory bonds are put in place to help guarantee that laborers and suppliers are paid for the work they perform on the bonded contract. Of all the various contract bonds, I would argue that the payment bond is the most prone to be subjected to claim activity. Most contractors don’t have a problem getting the work done satisfactorily but sometimes there isn’t enough money to pay all of the bills after the project is through. If a claim were to happen against a payment bond the surety will determine if the claim is valid and pay to resolve the claim, this in turn keeps the owner’s project free of attachment liens.
Performance Bond: Performance bonds are put in place to safeguard against work being performed outside the contract’s specifications, terms or conditions. If a claim is made against the bond the contractor is usually given the opportunity to amend the mistakes in question but if this is not possible, the surety company may hire a cure contractor to finish the contract per the specs. or pay the owner to make the obligee whole.
Maintenance bonds: Maintenance bonds, Defect bonds or Warranty bonds are in place to help guarantee that if defects in labor or material arise during a certain period after completion of the project that the contractor will fix these issues at no cost to the owner. Should problems arise and the original contractor doesn’t repair the defect, then a claim can be made against the maintenance bond. The surety will then decide if the claim is valid and choose to either hire a cure contractor or pay the owner to solve the problem.
Supply bonds: Supply and or Service bonds are not as common as construction performance and payment bonds but they are not rare. Supply bonds are put in place to guarantee that equipment, supplies or materials are delivered over a certain period of time and for a certain dollar amount typically spelled out in the purchase order. If the supplier fails to provide the products per the purchase order, then a bond claim can be made and the surety company that provided the guarantee will be obliged to pay the bond claim.
Subdivision bonds: Subdivision bonds also known as completion bonds or site improvement bonds are required when a contractor is tasked with putting in public improvements such as a road or off site sewer and water systems for a new development. The strange thing about subdivision bonds is that the bonds do not follow a construction contract like you see with performance and payment bonds, instead the bonds are payable to the local municipality that issued permits to develop the land per its development agreement. Due to the boom and bust nature of development any subdivision bond that is sizable requires full cash collateral to be approved.
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