Anyone working in construction will need to understand that surety bonds are something that need to be posted for projects. However, there are a number of different types of surety bonds available so it can be difficult to determine which one to get. There are some common types of surety bonds that you should know about if you run a construction company.
Contractor License Bond
Before being licensed to work on projects, contractors will generally have to have a contractor license bond. In many states this bond is required by law and the contractor will not get the license without one. In these cases, if a contractor attempts to work on a project without the bond they can face penalty fines, license revocation or other legal action. Some states will not require a bond, but you will need to look at the county and city regulations as well as they could require bonding.
It is important to note that not all construction projects will require a bid bond. However, they are frequently requested along with the financial proposal that is provided to the project owners. In these cases, the project owner will need the contractor to get a bid bond before they can accept the bid and award the contract to the contractor.
The bond offers the project owner so security in terms of the bid amount. The bid bond guarantees that the contractor will enter the contract for the original bid amount if they are awarded the project.
Payment and performance bonds are required for any contracts that will exceed $100,000. This is due to the Miller Act and will also need to be posted for any publically funded projects. This will include any repairs and alterations to buildings that will cost more than $100,000.
Payment bonds will ensure that subcontractors and material suppliers will get paid. The financial guarantee provides protection for the project owner for assuming these costs if the contractor cannot pay them. The surety bond will be liable for reimbursing the unpaid party for their loss through the appropriation of the surety bond amount. However, it should be noted that the bond will have an indemnity clause which states that the contractor or construction company will reimburse the bonding agent for the costs.
Performance bonds and payment bonds will generally be coupled because they will both protect the owner from losses due to contractor shortcomings. Performance bonds will ensure that the quality of the project is outlined in the contract. The bond will also detail the completion time of the project be upheld.
If the project is going to be taking longer to complete or is completed unsatisfactory condition then the owner can claim against the bond. If the claim is valid then the bond amount will be used to compensate the owner. This will only be valid if the contractor has failed to uphold the terms of the contract.
There are a number of different surety bonds that a contractor will need which floridagreenbuildinglaw.com goes over in more detail. Not all projects will require a bond, but it is important to know which one to get if they do.