The construction industry is rapidly growing, and with that comes the need for more contractors. The current workforce in the sector is at 7.21 million. Construction laborers make up the largest segment of professionals.
You know many things to keep track of during a construction project if you are a contractor. One essential item to remember is getting the appropriate bonds. So, what are construction bonds?
Construction bonds protect both the contractor and the property owner if something goes wrong on the job. The following article will discuss construction bonds and some tips for getting them.
Understanding Construction Bonds
Construction bonds are a type of surety bond. It is a three-party contract between the principal, the obligee, and the surety.
a) The Principal
It is the party that is required to post the bond. In the case of a contractor, this is usually the contractor or business owner.
b) The Obligee
It is the person that requires the bond. In most cases, this is the property owner or project manager.
c) The Surety
The surety is the party that guarantees the bond. It is responsible for paying any claims if the principal fails to meet its obligations.
Types of Construction Bonds
There are three types of construction bonds:
a) Bid Bond
A bond guarantees that the contractor will enter into a contract that they have tendered and been awarded. In a bid bond, the surety guarantees that if the successful proponent does not enter into a contract, the surety will provide compensation to the project owner if financial hardship is incurred. If the contractor fails to enter into a contract or complete the work, the obligee can claim the surety.
b) Performance Bond
Performance Bond ensures that the contractor will complete the project by the agreed-upon date. If the contractor fails, the obligee can claim the surety. In this bond, the surety guarantees the contractor’s performance, not financial stability. Financial stability means that the contractor will pay its subcontractors and laborers.
c) Payment Bond
A payment bond is a kind of construction bond that assures that the contractor will pay its subcontractors, laborers, and suppliers. This bond is usually required when the project value is over $100,000.
A payment bond works best when the contractor has a good credit history.
Tips for Getting Construction Bonds
Now that you know what are construction bonds, here are tips to get those bonds.
1) Have A Good Credit History
A payment bond is more likely to be approved if the contractor has a good credit history. A credit history depends on the following factors:
a) How long the contractor has been in business
b) The contractor’s credit score
c) Whether the contractor has had any bond claims in the past
d) The contractor’s financial stability
e) How much the contractor is requesting for the bond
f) Whether the contractor is a sole proprietor or a corporation
If you are a contractor, it is essential to have a good credit history. It will make it easier to get the bonds you need.
2) Have A Good Reference List
A good reference list can help you get the construction bond you need. The references should be from people who are familiar with your work.
In addition, the surety will want to know about your experience in the construction industry. They will ask questions such as:
– What type of construction projects have you been involved in?
– What was the value of the project?
– What was the duration of the project?
– How many people were on your crew?
3) Have A Good Project Plan
A well-written project plan can help you get the construction bond you need. Your project plan should include the following:
– The scope of the project
– The budget for the project
– The schedule for the project
These are some tips that can help you get a construction bond. It can keep your project and investment safe.