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Surety bonds: Why are they used by construction companies

If you are in the process of choosing a construction company for a project you will soon be having built, you may have been told to only hire one that has a surety bond for your job.

If you do not know much about surety bonds, however, that can be confusing. After all, why does a construction company need a bond, and how does it help you with your construction job?

Here are a few facts to help you decide if the construction company you hire should have a surety bond, or if you can get your project completed without one.

What is a surety bond? — It is a guarantee that is purchased by the construction firm from an insurance company. Once purchased, the insurance company then assures you, the client, that your job will be completed in the time frame needed and on budget.

That means, if the construction firm goes bankrupt, is unable to finish your job or goes a long way over budget, the insurance company will step in and make sure everything is completed to your satisfaction.

Why do you need a surety bond? — Thousands of construction companies go bankrupt every year, and many go bankrupt while in the middle of construction projects like yours.

If you were to hire a company that does not have a surety bond, and then they go bankrupt, you would lose everything you had paid the company so far. The only way for you to get your money back would be to sue. With many creditors already in line ahead of you, that is often a losing battle.

The guarantees a surety bond gives you — If you hire a construction firm that has already bought a surety bond for your job, this gives you guarantees on two levels.

First, the company has far more incentive to finish the job as, not only did they pay a high premium for a surety bond but the owner of the company probably put up something valuable he owns as an indemnity.

You also have another guarantee as, if the construction firm goes bankrupt or cannot complete the job on budget, the insurance company then pays to make sure you get what you need.

Higher level subcontractors will be available — As most surety bonds also cover the subcontractors as well as you, they do not have to file a mechanics’ lien if a surety bond is in place.

This often means higher qualified contractors from top-ranked firms are more likely to sign onto the job, as there is less chance they will lose money owed to them as well.

What happens if the contractor defaults on your job? — If you do end up hiring a contractor that defaults on your job mid-way through, you should not have any concerns about getting your job completed.

This is due to the insurance company immediately taking over where the construction firm left off, and hiring the right people to finish the job for you.

By | September 22nd, 2017|Categories: Feature, Finance, General, Investment|0 Comments