In these uncertain times, when entering into a contract, you’re often looking for ways to protect your investment, whether it be money for your time or an equipment loan. Taking out insurance is one way of protection, but so are bonds. You can request the contractor you’ve enlisted to perform a service on your behalf to take out a surety bond. This will provide you with the assurance they’ll complete the work they’ve agreed to, otherwise, you’ll receive financial compensation. If this is something you’re interested in, this article will explain what they are and how you can benefit from them.
What are Bonds?
Surety bonds are a three-party contract. It’s basically a promise made by a surety to the owner, known as the obligee, stating that a third party, typically known as the principal or obligor, will perform their obligations, as per their contract with the obligee. An example of this would be the surety assuring the obligee that the contractor will build a construction project for them, as per the conditions laid out in their contract.
If the obligee believes that the principal has failed to deliver on their part of the contract, they can decide to proceed in making a claim to the bond. If they’re successful, then the obligor will have to pay the required amount. However, it’s worth noting that should a contractor default, the surety will pay the owner’s costs to have the work completed as stated on the surety bond.
A surety bond is usually purchased by the contractor for the benefit of the owner. It provides reassurance to the latter that the former will provide the service, as agreed in their surety bond. If you’re thinking of entering into a surety bond, you should seek the advice of a surety bond specialist to find out more. Payment methods will depend on the type of bond, although it’s worth knowing that they may require a percentage value of the project as a down payment, or alternatively an annual premium. However, an expert in surety bonds will be able to advise you further on this, so be sure to find out how payments will be made.
What are the Benefits of taking out a Bond?
Although there are a few benefits of taking out a bond, perhaps being one of the most cost-effective ways to finance contract obligations is at the top of the list. There are others that include the following.
A surety bond provides a guarantee to the owner of a project that contractors will deliver on their agreement as per the bond. This is also known as a performance bond, which often has to be taken out by the contractor as soon as they’ve been handed the contract to work for the owner.
Another advantage is that, unlike insurance policies that tend to only cover certain losses that are often subject to exclusions, surety bonds usually cover all aspects of a contract that a contractor has defaulted on. This is because it’s based on an underlying contract and not a standard blanket cover.
Furthermore, surety providers don’t require security over a contractor’s company assets. Nor do they require surety bonds to be supported by other means, such as money or collateral. They can also be a cheaper alternative to bank guarantees as they don’t have high base rates or line fees. This can allow a contractor to free up funds as well as still tender for additional contracts.
Additionally, if a payment bond is taken out at the same time, which is often the case, it will also protect subcontractors, whether they’re working for the contractor, or supplying materials. By doing so, they are given the assurance that they’ll be paid for their work. The contractor may also be vetted to ensure that they are qualified to deliver on their part of the agreement. This will include checking their workers are suitably qualified to handle certain jobs and machinery, as well as proving they have the correct equipment to complete the work they’ve said they can.
Surety companies will also conduct checks to determine that contractors have the financial resources to complete the job they’ve tendered for. Additionally, they’ll be required to prove they have a good credit history and reputation before most surety companies will even consider issuing them a surety bond.
It’s worth knowing that surety bonds can be used by anyone using contractors to work on their behalf. Therefore, if a contractor hires a subcontractor to work for them, then the relationship becomes one of obligee and obligor, respectively.
A surety bond can often extend after the contractual period to include what’s known as a maintenance period. This could last for around a year after all contractual obligations have been met. This covers any issues that may occur or if something requires amending. Alternatively, it can also give the contractor time to contest any complaints filed.
Bonds are an effective alternative to insurance cover or an ideal accompaniment to one. Whatever your needs may be, it’s worth seeking advice from a specialist in bonds, especially if our article has got you interested in using a bond to protect you from any possible financial loss from a contractor. This way, you’ll not only be able to find out what type of bond is best for you but ask questions as well. By doing this, you’ll find something that will provide you with the security you need so that your project won’t suffer in the long term.