Surety bonds are often associated with insurance, owing to the fact that bonds are sold…
Making the apt choice to mitigate as well as manage risks on construction projects, and then selecting the best fiscally responsible option that promises the timely completion of the project are imperative to a sound business.
Remember, you have already taken enough risk at the start by going into this small business venture of yours. You can’t afford to take more, especially when any construction project crops up that is specifically related to your business as a whole.
A surety bond can easily help you out in such circumstances by keeping your money in safe hands. It gives you financial security coupled with the assurance that your contractor will be able to complete the job on schedule no matter what the circumstances.
In this article, we’ll discuss the different aspects of surety bonds in greater detail. So let’s take a peek without further ado.
First things first: what are surety bonds?
A surety bond is an agreement between 3 parties where the surety company assures the owner (AKA the obligee) of the fact that the contractor (AKA the principal) will complete the contract no matter what the policy.
The two main types of surety bonds are:
• Performance bonds
• Payment bonds
Let’s explain these two now in a bit more detail for your reference.
Performance bonds: These are the bonds where the parties involved consist of a principal, the surety and the obligee.
The performance bond guarantees the fact that if the principal tries to harm the interests of the obligee for any reason whatsoever, the obligee may get himself/herself a compensation from the surety company after filing a valid claim to them.
These bonds are usually concerned with the performance of a contractor. If it doesn’t stay up to the mark, the claim can be filed according to the terms mentioned in the bond.
Payment bonds: The payment bonds are mainly concerned with the interest of the laborers, subcontractors and the material suppliers who are working on the very same construction project.
The payment bond guarantees that they would receive their allotted payment no matter what the circumstances.
The issuance of the surety bond
The surety bond is usually issued by a surety bond company. The bond is issued after assessing a host of things such as:
• The reputation of the contractor.
• The contractor’s ability to meet the bond mentioned obligations.
• The contractor’s experience to match the requirements of the contract.
• The credit history of the contractor.
• The contractor’s financial strength.
• The contractor’s equipment and his/her human resource.
If the surety bond company is satisfied with sit, the bond is issued without any hesitation.
The surety bond claim process
So the obligee decides to file the claim because s/he’s not happy with the contractor. The surety then starts on an investigation of the case by keeping the interest of the both the parties in mind.
These are the processes that usually happen in an investigation:
• The contract between the obligee and the principal is reviewed thoroughly.
• The progress of the contract is then assessed in an unbiased manner.
• Consider whether the contractor still has any obligation to the obligee at that point of time or not.
• Find out whether there has been a breach or not.
If the surety finds out that there has been a breach of the contract, s/he goes ahead with the claim addresses without any further ado.
What are the things that can happen if the surety finds out the contractor is indeed a defaulter?
So the investigation’s done and dusted, and the surety finds out that the contractor is indeed a defaulter. S/He can then do three things:
1. Advices the obligee to explore a second option
The surety advices the obligee to tender a new option to complete the remaining job.
The remaining price (if any) is paid by the surety himself/herself either directly to the new contractor or the obligee.
2. The surety takes over in place of the contractor
The surety makes it a goal to finish your project and hence, he takes over in place of the contractor and does everything required for the completion of the project on his/her expenses.
3. The surety lets the obligee do anything s/he wants
This is usually done when the surety feels that the obligee’s project completion plans are reasonable enough.
Hence, the surety steps aside and lets the obligee do anything s/he wants for project completion at the surety’s expense.
So that’s it then. I think that pretty much covers almost everything that you need to know from the business point of view. To be on the safer side, it’s always advisable to go for a surety bond for any construction project because of financial safety and assurance. You, as a small business entrepreneur should pay special heed to it. With that, I’ll sign off finally for the day. Hope you had a good read.
Latest posts by Warren Alter (see all)
- All You Need to Know About Surety Bonds for Your Businesses - July 9, 2017