Bonds are an incredibly important part of any construction business. They protect other parties involved in your construction project from liabilities that may come up while you’re building. Construction projects are massive, expensive undertakings, and the bond industry helps ensure that no one goes under due to a mishap. However, it’s on construction companies to know what kind of bonds they need and how they work. Here are three bonds that you should know about before taking on a new job:
Contractor license bonds are necessary for contractors to get their licenses to operate in the first place. These are basic bonds that ensure the contractor adheres to the terms of their contract. It protects the obligee (the entity that requires the bond) and the public from financial liability if the contractor does not complete the project according to their contract. If you don’t correctly fulfill your contract, then your client can file a claim against your bond. The bond company will then pay them (assuming the claim is legitimate) and charge you for the amount they’ve paid. With these bonds, the surety bond company holds you accountable for the work you do under your license.
Maintenance bonds ensure that a contractor performs any maintenance on something that they’ve built for a set amount of time. Every building needs maintenance from time to time, but new buildings aren’t supposed to encounter significant problems for a little while. If a building encounters major troubles not long after construction, then the construction company is liable to fix it. This is where maintenance bonds come in. They cover design issues or construction faults for a set period, ranging from a few months to a few years. Though not always required, they are an important type of bond to know about, especially if you expect to do work for the government.
Payment bonds are for the people that you pay to get your work done. This includes any subcontractors you hire to complete work, as well as suppliers of your materials. If a construction company goes bankrupt mid-project, it’s usually unable to pay everybody who worked with it throughout the process. With a payment bonds, their surety bond company will pay out to their creditors, preventing a cascading wave of defaults on payments. Regardless of the quality of the work you’ve done, your payment bond ensures everyone who needs payment gets it.