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How Construction Bonds Work Part 1

Contractors that take on public projects or large-scale projects, in most cases, need to be bonded since most construction bonds are likely a contractual obligation. A construction bond is a type of surety bond used in construction projects to protect parties against financial loss. The bond is a three-party agreement between the one who needs bonding (the contractor), the one requiring the bond (the obligee), and the one who underwrites the bond (the surety).

Our Sarasota construction attorneys know that understanding bonds is essential for contractors. Read this three-part article to ensure you that you have a solid understanding of construction bonds. This section will cover the different types of construction bonds. Read part two to learn why some contractors have trouble getting bonded and what factors strongly influence a bond approval. Part three will cover bonding misconceptions and conclude our series. Don’t hesitate to contact a Sarasota construction attorney if you need legal assistance with bonds.

Frequently Used Bonds

  1. Bid Bonds: Usually required by the project owner (obligee) before accepting a bid and awarding a contract. It protects the obligee if the contractor fails to honor the original bid amount. If a contractor does not honor the bid, both the contractor and surety are liable for any extra costs incurred for a replacement contractor. A bid bond claim commonly arises when the price of the work changes after a project starts. Contractors must ensure that they keep a full record of all their paperwork so that they can disprove a claim. The surety professional is a contractor’s best line of defense for preventing a claim.
  2. Performance Bonds: This bond is a legal requirement that guarantees that a contractor will complete a project per the terms of the contract. A contractor’s failure to perform means (e.g., poor workmanship, project abandonment) the surety is responsible for funding the completion of the project (finding a new contractor to complete the work). Before accepting a claim, your surety will investigate the claim to assess its validity. If a claim is valid, be proactive and consult with one of our Sarasota construction lawyers to ensure you respond to the claim properly.
  3. Payment Bonds: A legal requirement that guarantees that obligees such as suppliers and subcontractors (in some cases, it extends to lower-tier suppliers and subcontractors) will be paid. The bond must be purchased before a contract over $100,000 is awarded. If the suppliers and subcontractors are not paid, the surety is responsible, and likewise, the contractor must reimburse the surety. This bond is beneficial because mechanic’s liens cannot be filed against public property.

If you would like to speak with a Sarasota construction lawyer, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.