Q:
What is the pre-qualification for Performance and Payment Bonds for contractors?
A: In the construction industry, the most basic characteristic that is common to companies in the industry, is that the work is performed under contractual arrangements with customers. The contract is usually bid or negotiated, and specifies the work to be performed, the basis of determining the amount and terms of payment of the contract price, and generally requires total performance before the contractor’s obligation is discharged.
After the award of the contract, a performance and payment bond is generally required from the contractor to complete the work. The performance bond provides protection to the owner against the contractor’s failure to perform the contract in accordance with its terms. The payment bond is governed by state laws, but generally covers the contractor’s labor, subcontractors, and suppliers.
The primary function of surety companies is to pre-qualify the contractor by examining the contracting entity to determine if it has the management, experience, equipment, and financing capability to get the job done. If, in the judgment of the surety, the contractor can perform the contract, the surety will provide the required bonds. For a fee, the surety provides a guarantee to third parties that the contractor will fulfill obligations of performance and payment under the contract.
As anyone involved in commercial development and construction knows, business owners must protect themselves against a vast number of potential crises that can befall any project – including employee theft, work stoppage, injury, unsavory business practices and natural disasters. Surety bonds, such as performance and payment, and Employee Dishonesty Bonds were designed to protect against such risks. Types of bonds are:
Performance Bonds – Performance Bonds provide financial security and construction assurance by guaranteeing that contractors will perform the work they are contracted for and pay the specified amount allotted to subcontractors, laborers, and material suppliers. These bonds frequently incorporate payment bond and maintenance bond liability.
Employee Dishonesty Bonds - Owners must also protect against the unsavory acts of the contractor or subcontractor’s employees. A good way to protect assets against dishonest employees is through Employee Dishonesty Bonds. Generally, this type of bond guarantees that the employees will handle the employer’s money and/or property with fidelity, or loyalty. Bonding employees is generally known as a risk-free way of ensuring that an employer can recoup dishonest acts made on the employee’s part.
Business Services Bonds - This type of bond protects against dishonest acts committed by employees at a customer’s property. If an employee is found guilty, a Business Service Bond will protect the employer from liability to the extent of the bond.
How can project owners be assured that the bonds will be honored and what exactly does a bond entail? What additional benefits can be expected from the bonding a project? Not only owners, but lenders, taxpayers, contractors, and subcontractors are all protected and can expect mutual benefits because:
- The contractor has undergone a thorough pre-qualification process and is deemed capable of fulfilling the obligations of the contract;
- Contractors are more likely to complete bonded projects than non-bonded projects because the surety company has personal or corporate indemnity from the contractor;
- Subcontractors will find it unnecessary to file mechanics' liens on the project when a payment bond is in place. Because of the general contractor’s bond, the sub-contractor can file a claim against the payment bond and the surety company will assist the general contractor in working out the issues, paying out the claim if need be;
- Bonding capacity can help a contractor or subcontractor’s growth by increasing project opportunities;
- The surety bond producer or underwriter can help obtain benefits and offer necessary assistance and advice;
- Surety companies may prevent a default on a project by offering technical, financial, or management assistance to a contractor;
- The surety company will step in and make sure the contract is completed in the event of contractor default.
For more information on
Construction Bonds, contact your
Orgill/Singer & Associates Representative.
As anyone involved in residential development, commercial development and construction knows, business owners must protect themselves against a vast number of potential crises that can befall any project – including employee theft, work stoppage, injury, unsavory business practices and natural disasters. Let Orgill/Singer protect your interests.
