Assuring Payment and Performance for Construction Projects
The construction business contains a lot of risks, financially. Failure to perform on the part of the contractor or his staff results in much stress and lost time and money, spiraling down to even more losses for the project owner thereafter. Bonding for construction protects owners and developers from such a mess. The legal instrument ensures them compensation for losses incurred.
What do I need to know before applying for bonds?
Bonds, before they are issued, require assessment from a financial institution or a crediting firm. The project’s risk is calculated, which includes the contractor’s track record in completing projects in a timely manner and documents supporting financial stability for all the parties involved. From there, the underwriter decides if a bond is to be issued or not.
The government mandates projects to have bonding for construction if the agreed payment reaches a particular amount, so be prepared with as much supporting documents as possible.
What is the significance of bid bonds?
Bonding for construction, in the form of a bid bond, is required for most projects. It formalizes the agreement among the project owner, the bonding company and the contractor.
For the owner, the bond signifies that the project’s pre-requirements have been approved by the bonding company. Funding the entire operation shouldn’t come as a problem, once the project passes the bonding company’s assessment.
For the contractor, he is expected to perform the designated tasks at the price stated on the contract. Replacing his services comes easy if the owner avails of a performance bond.
Bid bonds must be submitted upon bidding; otherwise, the bid may not be approved. Promptness is absolutely necessary to avoid complications and delays in the project.
Why is a performance bond important?
Erring contractors have a tendency to not deliver work on time if they’re handling multiple projects simultaneously. Project owners stand to incur losses, especially if their clients depend much on the structures to be erected. A performance bond guarantees that the owner or developer won’t shell out money for switching contractors in completing the task, provided that the original contractor fails to deliver.
The bond somehow assures owners that their hired contractors will perform. Erring contractors come out as the biggest losers. They are at risk of not receiving payment for the work done, since they failed to honor the initial contract – the project terms they agreed to fulfill.
Is there a need for a payment bond?
In a construction project, a contractor hires suppliers and subcontractors to perform critical tasks, such as operating tractors or determining the types and number of equipment necessary. Some contractors, for whatever reason, fail to deliver the operational fees to their staff. This circumstance highlights the need for a payment bond.
A payment bond compels a contractor to pay his staff at the agreed amount. Non-payment entitles a court case against the erring party. In addition, his image as a professional will be tarnished by such an offense, leading to lost clients.
Construction projects involve multiple parties. Monitoring the progress of each can be quite complex. With complete bonding for construction, you need not worry too much about the operation. It’s got your finances covered. The same goes for the work to be done by people you hire.