The Importance Of Surety Bonds
Many business owners see the bonding process as one big pile of inconvenient paperwork. The reality however is that without the financial support of bonds along with the financial backing of surety bonding companies the entire construction process would be askew. This is why surety bonding is so important throughout construction process. Bonding ensures that all parties involved in a project are covered financially in order to complete the project at hand. With bonding even if one party defaults on a contract the project will still have the financial backing it needs to continue.
Performance bonds are in place to guarantee that work on a certain project will be done to the specifications set forth in the contract within a certain timeframe. This allows other aspects of the project to be scheduled without the fear of loss that comes from rescheduling and such.
Consider the following: a renovation on a school. The process begins with the bidding process. School districts need to be certain that the contracted work can be completed within a certain time frame to ensure that when school starts in the fall the renovation is completed and children are not left without classrooms. If the work is not completed as specified many people will suffer. With bonds in place the obligee is protected from financial loss and is covered by the performance bond held by the contractor.
There are a variety of bonds used to ensure the flow of public construction projects. In order to bid on any government or public project contractors must have established a bid bond with a surety company. A surety company will look at the contractor’s history and determine a set fee on a bond. A bid bond states that the bid that is submitted is fair and reasonable. It states that a project can be completely fulfilled at the cost the contractor has bid. This ensures that contractors don’t manipulate the bidding process by submitting a low bid in order to get the contract only later to raise the amount required to complete the project.
Another bond that is required on public projects is a performance bond. A performance bond is a guarantee that states work will be performed as set forth in the contract. The work is performed using specific materials, with a specific time frame and is done so as stated within the contract. A performance bid protects the project owner from subpar workmanship and work not being performed within a certain time frame. With all construction projects a clock is ticking. One error on the part of a contractor or subcontractor can quickly spiral out of control. Bonds are used to ensure that the financial liability does not fall on the project owner. All contractors have the same goal: to complete the job in a timely manner with the expected outcome. Construction bonds help to protect all parties against financial catastrophe.
Surety bonds do not replace the need for insurance. Liability insurance is different that a contractor’s bond. Bid, performance and payment bonds are all used as another level of protection against things that occur that cannot always be controlled throughout the construction process.