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Construction Bonds

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Are you a construction contractor who knows how to get a construction bond, but would like to know more about the fiduciary relationships involved? If so, take a moment to understand construction bonds with the information provided below.

Surety Bond Defined:A construction surety bond is a guarantee that the contractor will perform the obligation as set forth in the bond.

Construction Bonds are a type of surety. Required by the financial backers of large construction projects, and for federal construction projects, these legal documents help protect project owners from being left in the cold by a contractor who fails to perform. Though a construction bond is not insurance,(as defined by the Federal Government) it does help to ensure the construction project's completion.

Terms Used for Construction Bonds

Construction Bond Surety Relationships Defined

Principal: The contractor who must perform the obligation.
Obligee: The entity to whom the principal and surety owe their obligation (usually the owner for construction bonds).
Obligation: States that what is agreed upon in bond will be performed. Common obligations for construction bonds are as follows:

A bid bond, the obligation states that the principal will honor the bid.

A performance bond the obligation states that the principal will complete the project;

A payment bond states that the principal will pay its suppliers.
Condition: States that the of the construction bond is in full effect until the obligation is completed, and that it is void once the obligation is fulfilled.
Beneficiaries: Entities entitled to sue on a bond, sometimes defined in bond or in legal statutes.

Types of Construction Surety Bonds

What Happens if the Construction Bond Obligation is Not Met?

If the bid bond, performance bond or payment bond obligations are not met, the principal and the surety are liable for the bond jointly and severally. There are penalties that apply for failure to comply with bond obligations.

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Who Can Grant Construction Performance Bonds?

Construction Performance Bonds can be obtained by the following entities:

How does a surety underwrite?

Each surety company has its own guidelines and underwriting criteria. However, the following basic factors will be taken into consideration in some format.

Capacity. Does the applicant have the skill and ability to perform the obligation?

Capital. Does the financial condition of the applicant justify approval of the particular risk?

Character. Does the applicant’s record show him to be of good character and likely to perform the obligation he or she assumes?

Requirements for Individual Sureties

Individuals may act as sureties to satisfy bonding requirements on federal projects if they have certain acceptable assets in the required amounts to support the bonds. Allowance for individual sureties may enhance competition by allowing awards to contractors that might not otherwise qualify to obtain bonds from an approved corporate surety.

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Surety Bond Requirements on Federal Projects

The Miller Act, provides that all federal construction contracts performed in the US require a performance bond; a payment bond, and other surety bonds as well. This Act is inapplicable to contracts under $100,00 due to the FAS Act of 1994. The FAS act directed agents to develop alternatives to surety bonds for contracts between $25,000 and $100,000. These statutory requirements are implemented in FAR Part 28, Bonds and Insurance.

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CONSTRUCTION BID BONDS

A bid guarantee is required on federal projects whenever a performance bond and/or a payment bond is mandated. Bid guarantees usually are in the form of bid bonds. A bid guarantee must be at least twenty percent of the bid price; a maximum of $3 million.

CONSTRUCTION PERFORMANCE BONDS

Payment bonds and performance bonds are also required by law for all federal contracts over $100,000. The surety is entitled to receive information from the contracting officer concerning the progress of the work, payments, and estimated percentages of completion.

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CONSTRUCTION PAYMENT BONDS

Payment bonds are required for all federal construction contracts over $100,000. Each solicitation must state that a payment bond and performance bond are required, the penal amount required for the bonds, and the deadline by which bonds must be submitted after contract award.

 

Sources Cited:

Construction Surety Bonds in Plain English

FAR Part 28 : Bonds & Insurance

FAR 53 Forms

The Miller Act - Law requiring contract surety bonds on
construction projects is known as the Miller Act.

 

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Disclaimer: This page is not meant to provide conclusive legal definitions of construction surety bonds. It is only to serve as a reference by which you may conduct further research into the legalities of construction surety bonds.

Disclaimer: This page is not meant to provide conclusive legal definitions of construction surety bonds. It is only to serve as a reference by which you may conduct further research into the legalities of construction surety bonds. The contents of this web site are subject to change / revision without notice.

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Construction Bonds  | Construction Bond Alternatives |  Bid Bonds  |  Surety Bonds  |  Performance Guarantees