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.