CONSTRUCTION BONDS ON PUBLIC PROJECTS

CIB VERIFIES BONDS...

WHAT IS A CONSTRUCTION SURETY BOND? SURETY BONDS ARE REQUIRED BY LAW ON MOST PUBLIC PROJECTS.

A BOND IS A CONTRACT OR A GURANTEE AGREEMENT WHICH CONTAINS THE PROMISE OF A THIRD PARTY, A BONDING COMPANY OR SURETY, TO PAY A FIXED SUM IF CERTAIN ACTS ARE NOT PERFORMED. THE ACTS ARE TYPICALLY NON-PERFORMANCE OR NON-PAYMENT.

A SURETY BOND IS NOT AN INSURANCE POLICY. RATHER, A SURETY BOND IS A GURANTEE, IN WHICH THE SURETY GURANTEES THAT THE CONTRACTOR, CALLED THE “PRINCIPAL” IN THE BOND, WILL PERFORM THE “OBLIGATION” STATED IN THE BOND.

FOR EXAMPLE, THE “OBLIGATION” STATED IN A BID BOND IS THAT THE PRINCIPAL WILL HONOR ITS BID; THE “OBLIGATION” IN A PERFORMANCE BOND IS THAT THE PRINCIPAL WILL COMPLETE THE PROJECT; AND THE “OBLIGATION” IN A PAYMENT BOND IS THAT THE PRINCIPAL WILL PAY SUBCONTRACTORS AND SUPPLIERS.

BONDS FREQUENTLY STATE, AS A “CONDITION” THAT IF THE PRINCIPAL FULLY PERFORMS THE STATED OBLIGATION, THEN THE BOND IS VOID; OTHERWISE, THE BOND REMAINS IN FULL FORCE AND EFFECT.

PRIVATE BONDS AND PERFORMANCE BONDS

MANY PRIVATE OWNERS REQUIRE SURETY BONDS FROM THEIR CONTRACTORS. WITH BONDS, THE RISKS OF PROJECT COMPLETION ARE SHIFTED FROM OWNER TO THE SURETY COMPANY PROTECTING OWNERS, THEIR COMPANY, LENDERS AND SHAREHOLDERS FROM THE COST OF CONTRACTOR FAILURE. THE USE OF BONDS ON PRIVATELY OWNED PROJECTS IS UP TO EACH OWNER.

TO BOND A PROJECT, THE OWNER SPECIFIES THE BONDING REQUIREMENTS IN THE CONTRACT DOCUMENTS. SUBCONTRACTORS MAY ALSO BE REQUIRED TO OBTAIN SURETY BONDS TO HELP THE PRIME CONTRACTOR MANAGE RISK. A PERFORMACE BOND GURANTEES THE OWNER THAT THE PRINCIPAL WILL COMPLETE THE CONTRACT ACCORDING TO ITS TERMS, INCLUDING PRICE AND TIME.

SUPPLIERS AND SUBCONTRACTORS HAVE THREE GOOD REASONS TO SECURE A COPY OF THE PAYMENT BOND. FIRST, TO BE ASSURED THE BOND EXISTS; SECOND, TO DETERMINE IF THE SURETY HAS THE NECESSARY ASSETS IN THE EVENT OF FAILURE; AND THIRD, BECAUSE THE BOND CONTAINS THE RULES OF THE GAME.