What is a Construction Bond?

December 28, 2015

A construction surety bond is commonly known as a contractor’s license bond. It is used to make sure that a construction project is completed as stated within a given contract. In the event that the contractor is unable to complete said contract on time, within budget or other ramifications stated within the contract the surety company will guarantee payment to the owner to prevent financial loss. This leaves the contractor on the hook to the surety company to pay back the amount that was paid out by the surety company.

In short a project owner or oblige enters into a contract with the principal or contractor to complete a specified project. Then the contractor or principal secures a surety bond from a surety company or surety broker who sells contractor’s license bonds. Local surety brokers can be found throughout online searches by looking under, “surety bonding firms or surety bonding companies”.

If a contractor fails to complete the project as stated within the contract the surety company must compensate the owner of the project for any loss or find another contractor that can complete the contract as stated. The surety company may then proceed to seek repayment from the original contractor for their losses.

When it comes to any federal, state or local government project the contractor is required, by law, to be bonded in order to bid. In fact some areas require a bond be in place before they will even consider issuing a contractor a construction license.

Surety bonds don’t only protect the project owner they work to cover subcontractors that are hired in order to complete projects that are contracted. The surety bond will cover the expense of suppliers, subcontractors and damage that occurs to the property as a direct result of the construction project as well as tools and materials that are damaged or stolen.

Construction surety bonds are only sold through certain agencies that are known as bond producers or bond agencies. The job of a surety agency is to work with contractors throughout the entire process of obtaining a bond as well as creating a relationship where they continue to supply bonds to the contractor as their construction companies grow and take on new commitments. A bond producer plays an important role. They should provide the following services:

The surety company offers advice that increases the profitability of the company by looking into management and all the technical aspects of the business.
The surety company will help contractors with their relationships with other service providers such as industry experts like accountants and attorneys.
In order to ensure that the financial requirements are met by the contractor seeking a surety bond the company is responsible to review all financial documents that are required by contractors seeking bonds.
The surety company is responsible for ensuring that the contractor has a surety bond that matches up with their needs. Most surety producers have relationships in which they offer bonds to more than one company. With this in mind it is important that the surety producer is able to maintain relationships with several various surety carriers at one time.
The main point of contact for a contractor is the surety producer. This remains the same throughout the entire bonding process. The surety company must remain in contact with both the contractor and the carrier throughout the entire process of the project.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs. Find out more information at https://www.bondingspecialist.com.