Construction Surety Bonds
Corporate surety bonds, when executed, provide a guarantee that the contractor, called the “principal,” will perform the “obligation” stated in the bond for the benefit of the owner, the “obligee.” They are not intended to protect the contractors that have to post them. Instead, these bonds are intended to protect the owner of the construction project against contractor failure and to protect certain laborers, material suppliers, and subcontractors against nonpayment. If the contractor fully performs the stated obligation, then the bond is void. If the contractor fails to perform the obligation stated, both the contractor and the surety are liable, jointly and seperately.
Types of Construction Surety Bonds
Labor and Material Payment Bonds
Maintenance and Warranty Performance Bonds
Contractors Licenses and Special Permits
Financial Guarantee Bonds (Release of Lien)
The intent of the bid bond is to keep frivolous bidders out of the bidding process by assuring that the successful bidder will enter into the contract when tendered by the owner at the price bid and provide the performance and payment bonds as required by the contract documents. Failing to do so is normally the difference between the low bidder and the second bidder up to the penal amount of the bid bond issued, generally expressed as a percentage of the amount bid, between 5 and 20%.
The most important facet in issuing bid bonds is the pre-qualification process that takes place before the surety’s approval of the bid bond. By the surety’s issuance, they are making a statement to the owner that, after evaluation of the contractor’s abilities, the contractor has both the financial capacity and resources to complete the project. This prequalification and third party guarantee has protected the taxpayer for years and is the cornerstone of the industry’s competitive bid process.
The enactment of the Uniform Electronic Transactions Act, (“UETA”) and the Electronic Signatures in Global and National Commerce Act, (“E-Sign”,) establish legal foundation and validity to electronic records and signatures. Essentially, UETA gives e-records and e-signatures the same legal status as their paper counterparts which allow for the electronic execution of contracts and surety bonds.
While changing the way business transactions are conducted, electronic bidding simply replicates the bond execution process, from signing the bond form by the principal and surety to physically delivering the form to the obligee electronically through the Internet or other electronic medium without paper or delay. The NASBP and the SFAA strongly support the electronic execution and filing of surety bonds as a way to reduce processing costs and increasing efficiency.
The Performance Bond secures the contractor's promise to perform the contract in accordance with its terms and conditions, at the agreed upon price, and within the time allowed.
Normally written in the amount of 100% of the contract price, the content of the performance bonds varies, depending on whether the project is federal, state, or private. Standard forms developed by various contractor, architect, and engineering associations have proven acceptable to sureties but any variance to standard industry bonds should be reviewed and approved by your Technical Assurance professional to understand each party’s rights, duties, and responsibilities. The surety will first look to certain options under the bond to cure a default by its principal and any limitation built into the form that precludes the surety’s willingness to entertain the obligation.
Labor and Material Payment Bonds
Labor and Material payment bonds insure that those who perform services, (laborers and subcontractors), or provide materials at the construction site will be paid. Since mechanic's liens cannot be placed against public property, the payment bond may be the only protection these claimants have if they are not paid for the goods and services they provided to the project. As a broad generality, on private work, the labor and material payment bond guarantees the owner that the contractor will deliver a lien-free project.
The specific coverage provided by labor and material payment bonds varies depending on whether the project is federal, state, or private. On federal projects, the bond guarantees payment under the terms of the Miller Act. On local projects, state laws and regulations determine the obligations and extent of payment guarantees. In Texas, Government Code, Chapter 2253 applies to Public Work while private work falls under the Property Code, Chapter 53.
Maintenance or Warranty Bonds
Maintenance or warranty bonds are guarantees against faulty workmanship or materials for a period of one year after completion of the work and acceptance by the owner. For a fee, this maintenance and warranty period can be extended for an additional year but concern is often expressed on exposures beyond a two year period.
License and Permit Bonds
License and Permit bonds are those required by state law, municipal ordinance or regulation that is required to be filed prior to being granted a license or engaging in a particular activity. Others may be required by statute in order to obtain a license from a state agency, or to meet financial responsibility. This includes bonds in connection with obtaining state or city contractor's licenses, bonds guaranteeing repair of damaged streets, bonds guaranteeing oversized vehicle loads, etc.
Financial Guarantee Bonds
Surety guarantees are used for many different financial contracts and for many different reasons. This would include: security deposits, release of lien guarantee, early release of retainage.