Bonds in Construction
Construction bonds are a form of surety bond that acts as a legally binding agreement between three different entities on a construction project:
- The Bond Obligee – The owners of the project or the person/company that benefits from the bond
- The Bond Principal – The contractor performing the bonded project
- The Surety or Bonding Company – The entity responsible for issuing the bond and paying the claim
Example: The Project Owner required John Smith Contracting to obtain a Payment Bond covering the construction project. John Smith Contracting obtains a Payment Bond from the Reliable Surety Company. John Smith Contracting then fails to pay Frustrated Subcontractor.
In the above example, John Smith Contracting is the Bond Principal. Reliable Surety Company is the Bonding/Surety Company. Frustrated Subcontractor is the Bond Obligee.
The purpose of a construction bond is to make financial assurances for the parties involved. There are several different types of construction bonds, each with its own set of specifications and terms laid out in the bond agreement. If the bond principal, for whatever reason, violates the terms of the bond agreement or is unable to finish a project, the bond obligee can make a claim against the bond for any financial losses or damages. Similarly, if a contractor, subcontractor, or material supplier isn’t paid due compensation for the materials, equipment or labor that they provided to a project, they can file a claim against a bond for their payment.
Different forms of construction bonds include:
- Bid Bond – A bid bond is required to be submitted alongside the bid itself when competing for a construction contract. It provides assurances that the contractor will complete the project with the submitted bid if they are awarded the contract.
- Payment Bond – This type of construction bond ensures that a contractor will pay workers, subcontractors, and suppliers along the project chain for any labor or materials provide for the bonded project. A claim can be filed by any party included in the project chain, not just the bond principal who purchased the bond.
- Performance Bond – A performance bond is a guarantee that a contractor will follow the terms and conditions laid out in the contract and that the contractor will perform the project through to completion.
- Maintenance Bond – The maintenance bond provides assurances to the project’s owner that the finished project will be free of any faults or defects for a predetermined time after its completion.
Construction bonds aren’t just a responsible idea, they are legally required under the Miller Act on any federal project over $150,000. Furthermore, each state has its own set of rules, commonly called “Little Miller Acts,” determining the amount at which a project is legally required to include a construction bond. The result is that nearly all publicly funded work is bonded.
The Bond Claim Process
If you believe you’re owed for financial losses due to a construction project, it is time to get the ball rolling on your surety bond claim process. In order to do so, take the following steps:
- Preliminary Notice – This will vary from state to state, but some require a preliminary notice to be sent out prior to filing a bond claim. In some instances, states will require that the notice be sent at the beginning of a project, whereas others do not require a preliminary notice at all.
- File the Bond Claim – The next step in the bond claim process is to actually file the claim itself. Much like the preliminary notices, requirements for filing a bond claim can vary by state. It is crucial to have met all the requirements and deadlines provided by the state in order to successfully file a bond claim. Our communication platform helps to track these different steps in the bond claim process and allows contractors and subcontractors to pinpoint where their claim is. We also provide access to the documents and document tracking needed to ensure that all requirements and deadlines are effectively met.
- Provide Bonding Company with Backup Materials – Once your bond has been filed, the surety company will contact you to inform you the claim has been opened and to request any supporting proof, as well as a sworn statement. Send the requested items to the surety company as quickly as possible; your claim can’t move forward without them. Using our digital document center to upload and share claim-related documents makes it easier to keep track of all important items and ensures that all parties can access and refer back as needed during any step of the bond claim process.
- Follow-Up – After you’ve provided the surety company with your supporting materials and the sworn statement provided by ConstructionDisputes.com at the time of filing, they will notify their customer, usually the prime contractor, that the claim has been made. During this time, the process can slow considerably while the surety company and contractor attempt to resolve the issue. Keep pressure on them with regular follow-ups in order to keep the bond claim process moving. To keep all official communication regarding your open claim at the top of mind and organized, our platform can be used as the main communication hub when dealing with the bonding company.
- Enforce Your Bond Claim – If your claim is denied or is unreasonably delayed, the next step would be to file a lawsuit against the surety company. There’s no guarantee that you’ll win the lawsuit, however, so this should be viewed as only a final measure.
We’re dedicated to providing construction professionals the transparency they need in order to make the best possible business decisions for themselves and their employees.
Frequently Asked Questions About Bond Claims in Construction
What Happens When a Surety Bond is Called?
If someone makes a claim on a surety bond and it is approved, the surety company will first give the bond principal the opportunity to make the payment. If they are unable or unwilling to do so, the surety will then satisfy the claim and seek repayment from the bond principal.
What is a Surety Bond?
An agreement between three parties for financial liability is one way to define a surety bond. The surety company issues the bond on behalf of the principal as a guarantee for the work and money they owe to the obligee.
What is Surety Bond Insurance?
“Surety bond” and “surety bond insurance” are often viewed as the same thing, but this is a common misconception. Credit is actually a better way to define surety bonds than insurance. Insurance protects the person who takes out the policy, whereas bonds protect who the holder is working with on the construction project.
What Does Bonded Mean in Construction?
To say that someone is “bonded” simply means that a construction bond has been obtained for the project.