KGE Real Estate

Josh Kayser is back from Surety Bonds.com to continue his discussion of contract bonds. This is the second of a 3-part series.

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Contract Bonds are often called Construction Bonds. The latter is a catch-all term that covers a host of different types of bonds that are associated with a construction project from start to finish. Essentially, Contract Bonds ensure that project owners are protected in the event that a contractor does not fulfill his or her duties as specified in a contract.

There are seven major types of Contract Bonds: Bid Bonds, Maintenance Bonds, Payment Bonds, Performance Bonds, Site Improvement Bonds, Subdivision Bonds and Supply Bonds.

Today, we’ll look at Maintenance Bonds, Payment Bonds and Performance Bonds.

Maintenance Bonds

Maintenance Bonds ensure that a contractor’s work on a specific project is without defects for a specified amount of time after completion. These bonds are typically mandatory upon completion of a construction project.

These bonds guarantee work and craftsmanship, protecting against a host of potential problems and errors, including design defects, workmanship faults and other issues. Contractors are responsible for buying Maintenance Bonds, which can be obtained through a surety company or even sometimes an insurance company.  But it is important to remember that surety bonds are not the same thing as insurance policies.

If a problem or defect arises, a project owner can file a claim against the Maintenance Bond. At that point, the bond issuer will work to ensure that the problem is corrected by the contractor or another qualified agent. If that is not feasible, then the bond issuer will determine what financial compensation is appropriate.

Maintenance Bonds only cover a limited duration. Once they expire, the project is no longer under any workmanship guarantee. They provide security and protection for the term of a given bond, but they are not a viable substitute for insurance or another maintenance plan.

For contractors, the price of maintenance bonds will depend on their credit and financial history. Contractors with low or poor credit should expect to pay higher rates and may have to find a surety company that specializes in bonding at-risk companies.

Performance and Payment Bonds

Performance and Payment Bonds provide a layer of financial protections for project owners against contractors who default or somehow fail to perform work as specified by a contract.

Performance Bonds and Payment Bonds are typically issued together upon the awarding of a contract. Generally, the two are issued as a single “Performance and Payment Bond” for a project. Paired together, they help guarantee that work is performed and that the contractor pays all subcontractors, laborers, suppliers and others.

For many public works projects, these bonds are required by law to help safeguard public investment. Mechanics liens can’t be held against public property, meaning that Payment Bonds represent the sole form of financial protection when subcontractors and others have not received payment on a given project. All public projects that exceed $100,000 are required by federal law to have surety bonds.

Subcontractors or other aggrieved parties can file a claim on a Performance and Payment Bond if they fail to receive payment. Bond issuers then ensure that compensation is received. The current market for these bonds is relatively stable given the current state of the economy. Contractors should expect traditional, stringent underwriting guidelines to be employed.

To learn more about Contract Bonds and other types of surety bond, visit www.suretybonds.com.

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Josh Kayser is a principal with Surety Bonds.com, a nationwide surety bond agency focused on consumer education and surety bond news updates.