all construction firms in business today will be out of business
six years from now, according to the Associated General Contractors
of America. An economic downturn, labor difficulties, material shortages,
equipment problems and a host of many other problems can cause a
contractor's business to fail - leaving projects at a standstill.
project owner, public or private, can afford to gamble on a contractor
whose responsibility is uncertain or who could end up bankrupt halfway
through the job. And how can a public agency, which uses the low-bid
system in awarding public works, be sure the lowest bidder will
provide the needed assurance. Performance bonds protect taxpayers
against financial loss should the contractor default or fail to
complete the job according to the contract.
guarantee that the contractor will pay certain bills for the labor,
material and subcontractors associated with the project.
These are only
two types of surety bonds. A surety bond is a risk transfer mechanism:
the risk of contract default is shifted from the project owner (the
government or a private party) to the surety. If a contractor does
fail, it's the surety company that pays, not the government, and
not the taxpayer.
When a contractor
provides a surety bond, the public can be assured that the contractor
has met the rigorous standards of an independent third party - the
surety bond company. After all, the surety bond company is committing
it's assets to guarantee a contractor's performance and that the
contractor will pay laborers, material suppliers and subcontractors.
Because of this evaluation, the project owner can be comfortable
knowing that the contractor runs a well-managed, responsible and
fiscally sound enterprise and has the experience necessary for the
specific project. This protection through pre-qualification is a
significant benefit of the bonding process that is often overlooked.
bonding is considered a line of insurance, it has many characteristics
of bank credit. The surety does not lend the contractor money, but
it does allow the surety's financial resources to be used to back
the commitment of the contractor, thus enabling the contractor to
acquire a contract with a third party owner.
The owner receives
guarantees from a financially responsible surety company licensed
to transact suretyship. Bonds perform the following functions:
that the bonded project will be completed. Guarantee that the
laborers, suppliers and subcontractors will be paid even if
the contractor defaults. This often results in lower prices
and expedited deliveries.
Relieve the owner from the risk of financial loss arising from
liens filed by unpaid laborers, suppliers and subcontractors.
the transition from construction to permanent financing by eliminating
the possibility of a contractor diverting funds from the project
an intermediary, the surety, to whom the owner can air complaints
the cost of construction, in some cases, by facilitating the
use of competitive bids.