Nearly all public construction work that is completed is done so through private sector construction firms. Jobs are bid on by private sector contractors. An open competitive sealed bid system is used to determine who is awarded the work. Many times the work is given to the contractor with the lowest, most comprehensive bid. With the use of surety bonds the system works well.
A Bid Bond is used to keep flippant bidders from the bidding process. They do this by promising that the chosen bidder will enter into the outlined contract as well as obtaining the required performance and payment bonds. If the bidder with the lowest bid cannot honor the contract, the owner is protected. The bid bond ensures the owner will be covered for up to the amount of the bid bond which is most often the difference between the lowest bid and the next highest bid.
A Performance Bond is an agreement that protects the contractor’s promise, contract. It is there to ensure that the contract is carried out in agreement with the terms and conditions that were agreed upon, at a certain price and within a certain amount of time.
A Payment Bond shields specific employees, suppliers of materials and subcontractors from nonpayment. The protection payment bonds provide is to claimants that have not been paid for their goods and services that they have supplied to the contracted project.
It is required, by law, that in most public construction projects that bid, performance and payment bonds are utilized. These laws have been in place for so long that little thought is given to why they were enacted in the first place. Contractors that are unable to acquire the bonds required complain that the law is unjust and unfair. Note that the law is only required on most public construction projects not all construction projects which still allows such contractors to obtain jobs. However, it is important that we understand why such laws were necessary requiring contractors to post bonds when performing public construction projects.
Before the laws were enacted the failure rate on public construction projects among private construction companies was high. What would happen is that private contractors became bankrupt before they were able to finish the contracted services. This left the government with half completed projects which tax payers were left to cover. The additional costs coming from the contractor’s default added to a substantial hit on taxpayers.
With government property unable to be subjected to a lien many laborers, material suppliers and subcontractors were left without compensation if the services they performed were not paid for. The government tried to use individuals as sureties on public construction projects. This however also failed as many times the sureties themselves were unable to honor their financial obligations. This chain of events led to the Heard Act. The Heard Act authorizes the use of corporate surety bonds to secure privately performed federal construction contracts. In 1935 the Miller Act replaced the Heard Act which is the current law that requires performance and payment bonds on federal construction projects.
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