Construction Bonds: How to Ensure Performance

In the world of construction contracting, bonds are issued to one party of the contract as guarantee against any non-performance or the party’s inability to meet obligations as set forth in the contract. In other words, the bond is secured to ensure that the contractor completes the obligations stated in the contract. Bonds are issued by surety and insurance companies. The rise of construction bonds occurred in 1935 when Congress enacted the Miller Act. The Miller Act requires primary contractors on certain government construction projects to post bonds guaranteeing performance and payment of subcontractors. The practice of securing construction bonds is also now in private contracts.

How to Secure a Bond

As discussed, construction bonds provide owners with the security that work and subcontractor payments as specified in the contract will occur. These bonds are commonplace for construction projects that require bidding. Once a prime contractor wins a construction bid for a project, an insurance company for the contractor will issue a bond to the owner of the project. The insurance company utilizes a calculation that analyzes the cost of the project, the contractor’s credit worthiness and other figures to arrive at the bond amount. Construction contracts will contemplate certain milestones, including a date on which the contractor must secure the bond. Any failure to secure the bond or failure to secure it in a timely fashion can cause project delays, which may lead to the contractor losing the contract and possible legal recourse.

The Function of a Bond

Bonds are typical in the real estate industry, specifically in the real property construction and development industry. It is important to note that construction bonds do not only protect developers from non-performance or non-payment to subs. It also protects against unanticipated events such as bankruptcy or insolvency. In addition, bonds are not required of general contractors only. General contractors can also require subcontractors to secure a bond. Therefore, in this scenario, subs are liable if they do not complete their performance as stated in the contract. How does the contractor gain access to the bond funds in case of a breach contemplated under the terms of the bond? The general contractor or owner possessing the protection of the bond can file a bond claim.

Bond Claims

If the owner or prime contractor discovers that the secondary contractor has failed to fulfill the obligations stated under the contract, it is lawful for them to file a claim to receive the bond proceeds. The bond company will require the claimant to prove that the other party did not meet its obligations under the contract. An investigation by the bond company may ensue. If the matter is contentious, it may require the involvement of the courts to reach a resolution.

Fort Lauderdale Construction Attorney

Obtaining a bond claim is quite a technical process if the basis for the claim is nuanced. If there is a bond involved in a construction project, there is a high likelihood that there is much at stake. Protect your construction project and your money. Attorney Brendan A. Sweeney has years of experience advising on bond matters. Contact us now for a consultation.

Resource:

investopedia.com/terms/p/performancebond.asp