Tuesday, 10 July 2012

Floyd Arthur Discusses the Different Types of Surety Bonds in New York


Risk and challenges are inherent in the construction and construction management business. If the financing for a particular project falls apart, or general contractors or subcontractors, pull out of the project altogether, that always important project runs the risk of being delayed or in the worst-case scenario, lost.

This will result in a loss of time and money for the owner, the general contractor, subcontractors and even suppliers. Surety bonds are a fail-safe that protects the parties involved from huge financial loss due to a variety of circumstances. Surety bonds with Floyd Arthur also serve the purpose of weeding out less qualified companies and subcontractors. 

In most cases, there are three parties involved: the principal, normally the general contractor but can be subcontractors, the obligee, which is likely, the owner, and the surety, which is the company that offers the bond. 

There are also three types of surety bonds with Floyd Arthur: bid, payment, and performance.  Each type of bond is used at different stages of a project and protects different individual's interests. Working together, the three types of bonds ensure a project runs as smooth as possible from bid to on time, on budget completion. 

The first type of surety bond is a “Bid Bond”.
This guarantees that the company or individual who bids on a contract agrees honor their bid and enter into contract if selected. The principal also agrees to provide both payment and performance bonds as required by the owner. In this situation, the principal is usually the general contractor and the obligee is the owner. This prevents contractors from backing out of a bid after it has been accepted and allows the owner to sue for any additional costs incurred. This is usually the difference between the price of the first and second choice bid. 

The second type of surety bond is a “Payment Bond”.
This type of bond is particularly important for protecting subcontractors. It ensures the owner that subcontractors and suppliers will receive payment from the principal, which again is usually the general contractor. The beneficiaries of this bond are the subcontractors and any suppliers. 

The third type of surety bond is a “Performance Bond”, which is a bit more complicated than the first two.
Essentially, this bond is a promise that the original contract will be honored. It guarantees the owner that the job will be completed as agreed, in the time frame agreed upon, and for the amount agreed upon. If the principal defaults, there are few options available to the owner. They can require the principal to complete the contract as agreed, select a new contractor to complete the project, or complete the contract with the surety.