Bonds are a way of shielding against non-performance of a contractor. It is an assurance to the client that they will be paid in the event that there is non-performance of the contractor. Bonds can be classified into two broad categories, on demand or conditional. It is required of conditional bonds that the client gives proof of non-performance and the resulting loss thereof.
Construction bonds, which are commonly known contractor bonds, are a representation of surety bonds. They offer financial assurance that construction project bills will be paid. The insurance company that issues the bonds or the bank gives guarantees the completion of the project under the commitment of a given contractor. Construction bonds are a protection to the assets shielding the project owner or the investor against poor work or even project non-completion. The following are the three main types of construction bonds: bid bonds, performance bonds as well as payment bonds.
1. Bid Bonds (or tender bond)
The purpose of this bond is to protect the client if the contractor fails to honor the bid. The client is obliged under the bond and has the sole right to take legal actions against the contractor, while the issuer of the bond is bound to implement the bond. In the event that the principle fails in honoring the bid, both the principal and the bank and insurance company (surety/ issuer of the bond) are held liable for any extra costs incurred during the process of re-contracting or re-tendering and consequently contractor replacement.
2. Performance Bonds
This type of contractor bonds is given to contractors to guarantee that they will be responsible for the completion of the project as per the terms and conditions thereof. The client calls upon the surety/ the issuer of the bond to run the project until completion if the principle fails. In such events, the surety re-assigns the contract to a new contractor or even fund the client to be able to complete the project.
3. Payment Bonds
A payment bond is an assurance that all the due payments to the subcontractors and suppliers shall be paid. The immediate beneficiaries of payment bond are providers of raw materials and subcontractors. The client benefits greatly since payment bonds are alternatives to mechanic’s liens as a cover for non-payment.
Eligibility to Construction Bond
Every issuer has its means of determining the eligibility of applicants of contractor bonds. However, by standards, applicants ought to have the right skills, resources and the capacity to execute the contract and comply with the terms and conditions of the contract. An analysis of the financial statements and further investigation of the work history, financial position, and credit rating. The surety performs all these.