As a construction contractor, you will receive various small and large projects. However, in most cases, the project owner will require a guarantee that you will complete the work on time according to the requirements.
Without this guarantee, they might not hire you or look for another contractor. The security they are looking for is a surety bond, which provides project owners financial protection against losses or damages. What are construction bonds, how do they work, and why do you need them? This article will address all these questions below.
What are construction bonds?
Construction bonds are a type of surety bond that is required for large-scale government and private projects. These bonds are mainly of four kinds: bid, performance, labour and material, and construction lien. Each of them fulfills a different function, and a project owner might require any of them depending on the project’s scale, costs, and other factors. General contractors, sub-contractors, and civil and service contractors usually need these bonds.
How do they work?
Construction bonds involve the contractor (you), the surety (insurance or surety company), and the project owner. It is a three-way arrangement between these parties. If you, as a contractor, failed to deliver on the project on time or caused unnecessary disruptions, causing financial damage to the project owner, they would file claims against you.
When that happens, the surety, or the insurance company, would pay the debts on your behalf. However, they will recover the money from you later because the surety is not your insurer but a guarantor, who guarantees a project’s completion on your behalf.
Types of construction bonds
It would be helpful to get an idea about the different types of construction bonds and how they work.
Bid Bonds
Bid bonds guarantee the obligee (or the project owner) that the principal (contractor) will enter into a contract with them if they win a tender. Even if they are the lowest bidder and offer the least amount of money to complete a specific project, the contractor would be bound to fulfill their obligations to the company with this bondage. Bid bonds are helpful for businesses because it helps them avoid the costs of reapplying for a tender if the contractor walks away later on.
• Consent of Surety
Sometimes, owners might also ask for a document called consent of surety. It is provided by a surety company during the tender stage, guaranteeing construction bonds even if the owner is a low bidder.
Performance Bonds
These are among the most common construction-related bonds and are mandatory for all public projects costing over 500,000 CAD$. Owners hire contractors with these bonds assurance because it guarantees that the contractor will complete a project according to the terms and conditions mentioned in the contract.
Sometimes, owners demand bonds for 50% or 100% of the total contract’s value. These bonds are of several types like CCDC (Canadian Construction Documents Committee), Form 32, and SAC Headstart Subcontractor.
Usually, general, electrical, mechanical, heavy civil, and road paving contractors require these bonds before starting a project. Although it was limited to the public sector industries a few years back, most private sector companies have also included it in their contract.
Labour and Material Payment Bonds
You require various materials, supplies, and labour to complete a construction project, which a supplier will provide you with. Before that, they will need a payment guarantee for all the services provided, known as labour and material payment bonds. However, most bond companies issue this bond along with the performance bond rather than separately.
Mechanic Lien bonds
Sometimes, the parties involved in construction might have an argument or disagreements during a project and file a mechanic lien against the site. Consequently, it is challenging for the project owner to pay you (contractor) until the lien exists. You or the other parties concerned can remove a mechanic’s lien with a bond, cash, or letter of credit. It comes into play in various circumstances, depending on the dispute.
How to choose a surety brokerage company?
Since the surety is your guarantor in a bond, you must do your research before selecting them, and this is where a brokerage company will help you immensely. They would understand your requirements, provide you with the expert advice you need, and help you get in touch with a dependable surety bond company. You could also visit their website and check the testimonials to get an idea of what the other contractors think of them.
The details mentioned above will give you some idea about what are construction bonds, how they work, and what are its types. It is crucial to select an experienced surety bond solution company for your bonds since they possess the expertise and knowledge and will help you identify your specific bonding requirements.
