Note: I received an email from Danielle Rodabaugh of SuretyBonds.com asking if I would be interested in a guest post about surety bonds. This is an interesting and important topic in construction risk management, so I am pleased to present Danielle’s post. I hope you enjoy it.
The general use of surety bonds in the construction industry is to protect consumers and project owners from both physical harm and financial loss resulting from imprudent contractors. Some contractors cut corners intentionally to save themselves time and money while others do so accidentally because they weren’t properly trained. No matter the case, surety bonds provide an effective form of protection against faulty construction work in three key ways.
1) Surety bonds ensure that construction industry regulations are followed.
Generally speaking, government agencies establish contract bond requirements as a way to regulate the construction industry. Each surety bond that’s issued functions as a legally enforceable contract that binds together three parties.
- The principal is the contractor or construction firm that purchases the surety bond as a way to guarantee work on a project.
- The obligee is the project owner, which is typically a government agency, that requires the surety bond.
- The surety is the agency that executes the bond, thus providing a legally binding financial guarantee that the contractor will fulfill certain obligations.
If a principal fails to meet the bond’s terms, harmed parties can make a claim to gain reparation.
2) Surety bonds hold contracting firms financially accountable for the quality of work they do.
Although surety bonds are meant to be used as preventative risk mitigation tools that ensure contractors work ethically, some contractors will still try to cut corners and conduct business in unethical ways. A number of specific contract bond types have been developed over the years to hold contractors accountable for their work at various stages of a project. A few of the most common contract bond types include:
- bid bonds that guarantee contractors won’t increase their bid once a project owner has accepted it
- performance bonds that guarantee contractors will complete a construction project according to contract
- payment bonds that guarantee contractors will pay for all subcontractors and materials as necessary
- maintenance bonds that guarantee contractors will be held responsible for a project’s durability for a specified time
<h4>3) Surety bonds provide a means for people to gain compensation.</h4>
Claims that are made on surety bonds within the construction industry are often a result of a contractor who has either left a job mid-project or who has completed a job that develops structural problems shortly after the project has been completed. If a contractors do either of these actions, the project owner or government agency funding the project can make a claim on the bond so the funds won’t be lost.
For example, a recent contract bond dispute took place in the Fair Weather subdivision of Sequim, Washington, after a contractor defaulted on his loan mid-project and abandoned 24 unfinished lots. Because local residents made a claim on the bond and recovered the losses, the city now has the funds to find a developer that could finish the project.
No matter what law requires a contractor to be bonded, rest assured it was put in place to protect against shoddy structures and the resulting financial loss. Although the surety bond process might seem like a hassle to contractors who need bonds, the reasons behind them should not be undervalued.
Danielle Rodabaugh is the editor of the Surety Bonds Insider, a publication that provides in-depth analyses of developments within the surety industry. The publication explains contract bond changes to help contractors understand the surety bond regulations that apply to them, whether they work in New York or California.
I am always happy to publish guest posts from others. If you are interested in writing a guest post for AEC Quality .com, I welcome your contribution. Thanks again to Danielle for writing this post.