Although you’re probably familiar with using Construction Surety bonds, you might not be aware of the legal relationships involved.
This type of bond is not an insurance policy, but a guarantee by a “surety’ that a contractor (“principal”) will perform its obligation under the bond. Failure to do so means that the “beneficiaries” of the bond can sue either the principal or the surety for the entire amount of liability. The person or firm to whom the principal and surety owe their obligation (“obligee”) is usually the owner. However, if a subcontractor furnishes a bond, the obligee might be the owner, the general contractor, or both.
There are three basic types of Construction Surety Bonds: Bid bonds, performance bonds, and payment bonds.
A bid bond guarantees the owner that the contractor will honor its bid and sign all documents if awarded the contract. If the principal fails to do so, the principal and surety must pay any additional costs to the owner in rebidding the contract — usually the difference between the two lowest bids.
A performance bond allows the owner to sue the contractor and the surety for failure to complete the contract according to its terms. Many performance bonds give the surety three choices: Completing the contract through a new contractor; selecting a new contractor to work directly with the owner; or allowing the owner to complete the work, with the surety paying the costs.
A payment bond guarantees the owner that subcontractors and suppliers will be paid what the principal owes. On a private project, the owner may also benefit by providing subcontractors and suppliers a substitute for mechanics’ liens. If the principal fails to pay subcontractors or suppliers, they have the right to collect from the principal or surety up to the amount of the bond.
To learn more about the benefits that Surety Bonds offer, feel free to get in touch with us.
