Ten Things to Keep in Mind about Surety Bonds
Managing the risks on your construction projects and choosing the best option to make sure that your project gets done on time, is very important to a running a successful business. When this is not being taken seriously, especially when dealing with a contractor or a subcontractor who is unsure about their commitments, you can be put out of the business quickly because of bankruptcy. Surety bonds give you the solution to those problems: providing financial security and making sure that contractors will finish the work and pay the laborers, suppliers, and subcontractors and giving the project owners the relief and protection.
1.Surety bonds for a construction project or business are known as contract surety bonds. Surety bonds assures the business owner that the contractor will follow through on what’s in the contract. To sum it all up, surety bonds are usually a three-party agreement.
2. Contract surety bonds come in three varieties. The first is the bid bonds, which give financial security, making sure that the bid has been submitted and that contractor will make sure they render the required performance and payment bonds. Next one is the performance bond, which protects the business owner from risks, specifically financial loss that happens when the contractor does not meet what the contract states. Lastly, the payment bond gives the security of making sure that the contractor will pay their workers, suppliers and others they hired for the project.
3. Surety companies are under insurance companies and surety bonds and regular insurance policies offered are risk transfer mechanisms implemented by the state insurance departments. The only difference is traditional insurance is made for the compensation of the insured in case of unwanted events or accidents, while companies who offer surety bonds operate in a different way. Surety bonds are made to prevent losses. The surety bonds stabilizes the contractors through financial strength and their skills and expertise.
4. The US Government requires contractors to get surety bonds to assure that they will do what’s stated in their contract and will pay those people they hired for the project. This law is also called the Miller Act and requires contractors to have two bonds on contracts that are worth more than $100,000.
5. Construction projects are usually full of risks. Thousands of contractors don’t last long, there was a 28.5% failure rate in 2004. Surety bonds give the guarantee that contractors will be able to complete their projects on time and keep all costs within the budget. Having surety bonds will give business owner the peace that a risk transfer mechanism is in place and the liability from construction risks are now in the hands of the surety company.
6. Premiums from surety bonds can vary from half of a percent to three of the contract’s worth, still depending on the size and timetable of the project and the hired contractor.
7. The surety company protects the owner and everyone who is involved in the project with the assurance that contractor will be able to finish the project successfully. Surety companies and surety bonds producers have an evaluation process for contractors and subcontractors performance and they have been doing for years. Before giving surety bonds, the surety company must be convinced that contractor has the following:
- A good reputation
- Can meet all responsibilities and tasks given
- Have contract requirements
- Have complete tools and equipment to finish the work
- Are stable financially or have financial strength for the project
- No bad credit records.
- Should have a good relationship with line of credit or banks
8. Failure for contractors are very common and sometimes it can be unavoidable. In situations like that, the business owner should declare the failures of the contractors. The surety company then investigates before placing a claim. This secures the contractor in case owner untruthfully declares the contractor’s failures. But when owner properly declares the faults, the options are often stated in the bonds.
9. Bonds are specifically stated in the contract and the contractors should make sure they have those. The contractor generally has the premium amount and it is entirely payable during execution of the bonds. If the worth of their contract has been changed, the premium will be modified or adjusted according to the contract’s worth. Surety bonds used for contracts are one of the best investments for getting great, skilled and qualified contractors. Surety bonds protect business owners from costs of contractor’s failure.
10. During evaluation process, contractors were judged on their abilities to meeting the agreements on the contract:
- Contractors usually tend to finish projects with surety bonds before those that do not have them.
- Subcontractors are not required to file mechanics’ lines when there is payment bond.
- Having surety bonds can help contractor’s business growth more by giving them more projects and opportunities because of the provided assistance and advice given by the surety bonds.
- The surety company will then release the contract.