What Your Contracting Company Should Know About Construction Bonds
Construction bonds are among the most common types of surety bonds, and they are an integral part of nearly every construction project in the country. Therefore, it’s very important to know what they’re all about.
In this article, we will discuss how construction bonds work, including the requirements for obtaining one and other essential information that construction companies should know about insurance bonds.
How Do Construction Bonds Work?
No matter which type of construction bond you’re dealing with, the basic principle remains the same. The construction firm that procures the bond (known as the principal) is bound by the terms stipulated in the contract. Failure to adhere to the contract terms entitles the party who contracted the services of the construction firm (known as the obligee) to file a claim against the surety bond to seek damages.
For instance, if the construction company experiences significant delays in completing a particular phase of the project, the obligee has the right to file a claim against the performance bond. Assuming the claim is valid, the bond issuer (known as the surety) will take corrective action to rectify the situation through payment or other measures. The surety will then have the right to recover the expenses incurred from settling the claim from the principal.
Ultimately, the construction company, as the bonded party, is responsible for reimbursing all claims to the obligee or the surety. The construction bond ensures that the aggrieved party receives compensation for damages while holding the responsible party (i.e., the contractor) accountable.
What Are the Requirements for a Bond?
Companies that seek construction bonds generally follow a set of standard procedures, starting with a review of the project requirements to determine if a construction bond is necessary. They will then obtain a bid bond from the surety agent and submit it along with their proposal. If awarded the contract, the company will approach the agent for a performance bond. They may also obtain a maintenance bond if required to cover any necessary repairs.
For most government projects, the use of a construction bond is mandatory. However, even if they are government-funded, certain projects are not eligible for construction bonds from American companies. These may include projects taking place overseas or on Indian reserves, private home remodeling projects, or multi-year construction projects.
There are some projects that might be too risky to insure by many US-based surety companies due to differences in laws, rules, and regulations.
How to Apply for a Bond?
The requirements for obtaining a construction bond vary based on the project’s nature, bond size, and the surety company’s policies. For bonds under $250,000, applying usually involves filling out a straightforward contract bond application form, providing details about the bond requirements, and undergoing a credit check. But for larger bonds, the application process is more complex.
Once the surety agency receives the application, their underwriters will assess the applicant’s credit scores and bankruptcies to determine the likelihood of the applicant causing claims and their ability to pay the surety back in case of a claim.
Underwriters calculate a bond price for each applicant, usually as a small percentage of the bond’s total value. The surety company will provide a quote for the construction surety bond premium, which is the final step in the process. After paying the premium, the surety agency will provide the necessary documentation to prove that someone has the required construction bond to finalize the project.
About Daniels Insurance, Inc.
At Daniels Insurance, Inc., we have a unique understanding of the risks that businesses like yours face on a regular basis. With the backing of our comprehensive coverages and our dedication to customer service and quick claims resolution, your business will be fully protected. For more information, contact us today at (855) 565-7616.