Trust is important in business, particularly in the construction industry. It is a high-risk industry, which is why commercial surety bonds are essential.
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Guarantees of performance are becoming increasingly common in contracts. The Pinnacle Surety bond insurance team has the experience to ensure that surety bonds and their responsibilities are properly implemented.
What is a commercial surety bond?
A surety bond in commercial construction is a type of financial credit guarantee. The obligee, the principal, and the surety are always involved in the transaction. A surety bond protects the obligee – the party to whom the bond is paid in the case of a default – from damages resulting from the principal’s failure to fulfill its obligations, up to the bond’s limit.
How a commercial construction bond works
A required bond for a construction project is a construction bond, often known as a contractor licensing bond. Almost all government and public works projects need a contractor to hold construction bonds. A contract bond or construction bond is usually required of a contractor bidding on a construction project.
The construction bond assures the project owner that the contractor will follow the conditions of the contract. On larger projects, construction bonds may be split into two parts: one to protect against overall task incompletion, and the other to cover against nonpayment of supplies and labor by subcontractors.
Typically, the project owner or investor is a government entity that has a contract task that needs to be completed. The obligee compels all contractors to post a bond to minimize the risk of financial loss. Because investors naturally want to pay the least amount feasible for any contract, the contractor chosen for the task is usually the one with the lowest bid price.
A principal—the person in charge of the construction work—states that they can execute the job according to the contractual policy by providing a construction bond. The principal assures the obligee, not only that they have the financial means to handle the project, but also that the construction will be completed to the highest quality standards set.
A contractor buys a construction bond from a surety such as Pinnacle Surety, which carries out comprehensive background and financial checks on the contractor before approving the bond.
What are the different types of commercial surety bonds for construction?
A construction bond’s financial guarantor is a surety bond, which assures the obligee that the contractor will perform according to the bond’s terms. Surety firms such as Pinnacle Surety will assess the principal contractor’s financial standing and levy a premium based on the probability of an unfavorable event occurring.
A surety can help a contractor with cash flow issues, as well as replace a contractor who abandons a job. A surety company can give several different types of construction bonds:
Bid bonds
For competitive process bidding, a bid bond is required. Each competing contractor must submit a bid bond with their bids to safeguard the project owner in the event that a contractor withdraws from the contract after winning the bid or fails to submit a performance bid, which is necessary to begin work on the project.
Performance bonds
When a contractor accepts a bid and begins work on a project, the bid bond is replaced with a performance bond. The performance bond protects the owner from financial loss if the contractor’s work is substandard, faulty, or in violation of the contract’s terms and conditions.
The performance bond is typically set at 10% of the contract’s value. This payment may be able to assist the customer in dealing with any challenges that have developed as a result of the contractor’s failure to perform.
Payment bonds
This bond, also known as a labor and material payment bond, ensures that the winning contractor has the financial resources to pay their employees, subcontractors, and material suppliers.
Subdivision bonds
A subdivision bond is a type of surety bond that covers all aspects of a new subdivision’s construction, such as streets, sewers, drainage ditches, gutters, and houses. A subdivision surety bond is a type of insurance that guarantees the project developer that the work within the subdivision will be completed according to the conditions of the contract.
Land development in subdivisions is initiated by the developer, not the project owner or the government agency. The developer must comply with state requirements and enter into a Subdivision Agreement before being permitted to commence building by the Project Owner or Government Agency. This authorization may be amended as needed to permit the building of subdivision improvements.
Completion bonds
A completion bond is a contract that guarantees financial compensation if a project is not completed on time. It safeguards the project in the event that the contractor defaults or if any other financial concerns occur.
Permit and licensing bonds
Construction permit bonds are a type of surety bond that is required by a local authority or a state agency in order to obtain a construction permit. Permit bonds are required to ensure public safety, protect a district’s financial interests, and ensure that licensed contractors adhere to building codes.
The permit bond, also known as a license bond, is a financial promise to the municipal, county, or state government that the contractor will adhere to all local laws, legislation, and permission restrictions. The bond can also serve as a guarantee to a municipality that once the development is completed, the city or county property would be returned to its original state.
When it comes to construction that involves work on city or county land, the property owner, not the contractor, may be asked to post a permit bond.
Choose Pinnacle Surety for your commercial construction bonds
We make getting construction contract bonds easy and stress-free at Pinnacle Surety. It is simple to obtain the coverage that you require. For over 25 years, we have worked with construction businesses and contractors and will be able to provide you with a service that meets your requirements. To learn more about the various commercial surety bonds, contact Pinnacle Surety today.