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The following article was published in our article directory on March 5, 2014.
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Surety Bonds for the Construction Industry

Article Category: Finances

Author Name: Gemma-Leigh Garner

Proponents of the construction of infrastructures need surety bonds from contractors not only because it is legally required but also due to risks involved in undertaking such huge ventures like putting up of buildings and bridges.

The contractor is responsible for the surety bonds. He includes the bond premium amount in the bid, payable upon execution of the surety bonds. In case of change of contract amount, premium is adjusted accordingly.

In most surety-bonded contracts, contractors will likely complete the contract as surety because the surety bonds provider requires personal or corporate indemnity from them. The indemnity agreement obligates the named indemnitors to protect the surety company from any loss or expense caused by the contractor's failure to fulfill its bonded obligation on the project(s) and any resultant loss under the surety bonds. This gives the surety company some guarantee that the contractor will shoulder all problems and use all his resources for their successful resolution.

Sub-contractors have no need to file mechanics liens on private projects when a payment bond is in place. Mechanics lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. It is a legal process to ensure that a contractor gets paid for his services. Originally, a mechanics lien was almost exclusively sought out by an actual mechanic. If an owner of an vehicle contracted for repair services and failed to pay the bill the mechanic could place a lien on the car's title by filing a claim in a local magistrate's office. This meant the car owner must pay off the debt before the title could be transferred cleanly to a third party. This practice found its way into the construction world where a homeowner would require licensed sub-contractors as carpenters, masons, general laborers and landscapers who in turn would require supplies from outside vendors.

A security bonds company can help contractors and sub-contractors succeed by increasing project opportunities and giving benefits of assistance and advice. Instead of allowing a contractor-client to default, the surety company will provide assistance and advice, including financial if it is more beneficial to all concerned.

Surety bonds companies stand behind the commitment undertaken by a contractor through a bonded contract. The contractor is primarily responsible for fulfilling the contract's obligations and the surety's obligations are secondary to the contractor's. Surety bonds premiums are service fees for the surety's expertise, underwriting services and financial backing.

After the surety bonds are written, the surety continuously evaluates the overall performance and financial position of the contractor. Adverse changes may cause the surety to reduce or terminate the bonding program, where positive results may serve as the basis for an increase in surety capacity.

Surety is prescribed by the owner. The surety bonds forms have very little room for negotiation. You have to very careful of the terms and conditions indicated therein. The inclusion of one-sided terms and language that shift risk inappropriately and unbalance the rights and responsibilities among the parties is not advisable. Onerous terms encourage parties to pass on contracts later, thereby lowering the competition for projects. Including significant cost contingencies tend to increase the overall price of projects.

Keywords: surety bonds

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