What is a Contractor Surety Bond?

Putting up a structure is usually a very expensive project to undertake. It’s for this reason, that as an investor, you have to seek protection against any loss when undertaking such a project. A contractor surety bond, therefore, is a type of construction bond that you use as a project owner to protect yourself against any sort of financial loss just in case the contractor is unable to complete your project or unable to meet the specified standards that have been agreed upon.  A contractor surety bond can also be referred to as a contractor bond.  There are different types of bonds, here is a look at them.

 

Why You Need a Bond

When you want to put up a construction project, you will usually require contractors to submit bids. At the same time, a contractor that is looking for a job will have to put up a contract bond. The contract bond assures the project you, the owner of the project that the work will be done according to the standards that you have agreed upon.

Generally, a construction surety bond involves three stakeholders: the owner of the project, the contractor or he that does the actual construction work and the third party backs the bond. The investor is also called the obligee. The obligee us in most cases a government parastatal that wants a certain project undertaken.

The investor will usually pick on the contractor that has the lowest bid in order to lower the costs of construction. The contractor is also known as the principal. When the principal submits a surety construction bond, he is in a way assuring the obligee that he has the capacity to finish the work as agreed in the contractual document. the obligee is assured that the principal has the financial capabilities to complete the work in the maximum possible quality that can be achieved as agreed.

How the Bond Works

A construction bond is backed by a guarantor, otherwise known as a surety. His work is to guarantee the investor that the work will be done accordingly by the obligee. A surety guarantees the obligee by carrying out the necessary financial evaluations on the principal to ascertain that the principal can actually do the work. Sometimes, a surety may help a contractor that has problems with cash flow. Also, when the contractor abandons the job before completion, a surety has the responsibility to look for another contractor to finish the job.

A surety can provide three types of construction bonds namely: bid bond, performance bond, and payment bond.

Construction surety bonds are almost always a requirement since many things can go wrong in a construction project. A contractor will be mandated to provide a construction bond when undertaking a government project or any public works.

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