Construction projects are usually massive undertakings with enormous amounts of money online. With so many different people involved from contractors to surveyors property owners, it is important that all parties take the necessary steps to protect themselves and their interests. One of the best ways to do this is to obtain a construction bond to add an extra layer of security to the arrangement. There is a range of situations where a construction bond is useful and yet there are still many people in the industry who don’t know what they are or how to use them.
To help clear up the matter, here is our guide to the different types of construction bonds that are available and how they work in practice.
What Are the Main Types of Construction Bonds?
There are various types of construction bonds but the most common are known as surety or contract bonds. Of these, there are three main types of contract bonds that can help businesses and individuals involved in the construction industry; performance bonds, payment bonds, and maintenance bonds. These are all secured by a third party known as the surety who protects the rights and interests of the other main parties in the agreement.
Performance Bonds
Performance bands are the most important and most commonly used construction bonds. Moreover, these surety bonds ensure that anyone who is hired to do a certain job in construction, whether that be wiring a house or laying foundations, completes the work to the standard agreed upon in your contract. There are many contractors who will try to cut corners but if your contractors try this then the surety will give you the money you need to hire a different contractor. The surety will then take the necessary legal action against your original contractor to recover their money and hold them to account.
Payment Bonds
The next type of contract bond which is very useful in construction is payment bonds. These bonds ensure that any contractor who completes the job they were hired for to the pre-agreed specifications is paid the full amount according to the terms of the agreement. If the company or individual who hired them withholds payment for any reason, the surety will pay the contractor instead and then take the necessary legal action against the other party. This is important because there are many examples of contractors ending up short-change by unscrupulous clients who don’t want to pay them.
Maintenance Bonds
The final type of contract bond which is commonly used for construction projects is maintenance bonds. These are similar to performance bonds in that they ensure that a job gets completed to the correct standards so that the hiring party is not left footing the bill when their contractors do a bad job. Again, the surety will give you the money you need to hire another contractor to make the necessary replacements or repairs. They will then take all necessary legal measures against the original contractor to get their money back with extra fees for the trouble.
The Three Parties in a Construction Bond Agreement
As explained above, what makes construction bonds uniquely effective is the power of the third-party surety. They are able to take legal measures against the other two parties if they do not meet the terms of their contract. The party in a construction bond who is doing the hiring is called the principal and the contractor or company who is being hired is called the obligee.
The principal may be a construction company who hired a specific contractor to complete part of a bigger job or it may be an individual who is getting some work done on their house. Likewise, the obligee may be an individual builder, or tradesperson, or may be an entire construction firm hired to complete a big construction project.
How Do Construction Bonds Work?
Quite simply, construction bonds work because the surety has legal powers that keep the principal and obligee in check. We have all heard horror stories of aptly labeled cowboy tradesmen, who take their customers’ money but don’t do the job that they were supposed to do. A surety stops this from happening and also protects any contractors who did their job properly from being taken advantage of by customers who refuse to pay.
There are many different ways that obtaining construction bonds can enable you to secure reliable and high-quality arrangements with contractors and building firms. Construction bonds are very useful for both individuals and large companies. If you have a construction project coming up, make sure you look into how construction bonds can help you.
