Understanding Construction Bonds and How They Are Used

Working in the construction industry can be confusing. As a contractor, you not only need to know the elements of how to build houses and other buildings, but you also need to understand all the legalities involved.
A project requires a contract between a contractor and the property owner, which is a major legal procedure in itself. Contractors are often also required to have a bond in place.
There are payment and performance bonds. When a general contractor provides a payment bond, it is ensuring that the project’s subcontractors and suppliers will be paid for a particular project. The bond also guarantees payment of the bills related to its scope of work.
If a contractor is unable to carry out the work in its contract, the property owner can call in the bonding company and it will take over. It will have the contractor complete the project under the terms of the performance bond. Public agencies often require bonds, especially on larger jobs, but some private owners insist on them as well.
Bonds are issued by a surety bond company, and they are not considered insurance. Contractors are actually required to reimburse sureties for claims paid. Sureties will have the contractor’s principals personally guarantee repayment if the company is unable to do so.
Another thing to keep in mind is that sureties are not protected by the automatic stays that keep creditors at bay during a bankruptcy. This means that subcontractors and suppliers would still get paid for a contractor’s bonded projects if a bankruptcy were to occur.
When someone makes a claim on the payment bond, they usually result in quick payment to subcontractors and suppliers so that the job’s progress can continue without much delay.
Payment bonds on public projects act as a safety net since contractors cannot secure payment against public property via a mechanic’s lien.
However, making a claim against a performance bond is a lot trickier. The bonding company has several options when this occurs:
- Write a check to the owner. It would then be up to the owner to use that money to finish the project. If it costs the owner more than that, the owner loses that difference.
- Deny the claim if the owner has wrongfully terminated the contractor. In that situation, the owner has to finish the job. It is not uncommon for the parties to end up in court if the owner has cost overruns.
- Find another contractor to complete the project. This has happened before. When a contractor defaults on a project, they may hand it over to the bonding company. The company will then find another contractor to take over the project.
Contact Us Today
Contractors and homeowners alike should know about bonds and how they are used to guarantee payment and performance on a project.
Do you have a construction contract in place? Protect yourself with help from the Florida bond claims lawyers from Linkhorst Law Firm. We have extensive experience representing parties involved in the prosecution and defense of payment bond and performance bond claims arising from construction projects in South Florida. Schedule a consultation to learn more. Call 561-626-8880 or fill out the online form.
Source:
constructiondive.com/news/the-dotted-line-what-happens-when-a-bonding-company-is-called-in/567940/