Monday, October 1, 2012

The Basics of Contractor Bonding

There are a great many types of bonds that are utilized in the construction industry: performance bonds, payment bonds, maintenance bonds, subdivision bonds and the list goes on. This article will attempt to provide some clarity to the confusion by defining the basic parties to a bonding agreement and laying out the specifics of various types of bonds.

First, a bonding agreement, in any form, is essentially a contract between three parties. The first is the Obligee. The Obligee is the party that is the beneficiary of the bond or the recipient of any monies to be paid pursuant to the bond. The Obligee is sometimes also called the beneficiary of the bond. Typically, in the construction context, the Obligee is the party that is going to pay for the construction services which is usually the owner of the property. The second party is the Principal. The Principal is the contractor or the party that is to perform services pursuant to the construction contract. The final party to a bonding agreement is the Surety. The Surety is the party that will pay in accordance with the terms of the bond.

The idea behind a performance bond is that the surety will pay the Obligee some amount of money to compensate the Obligee if the Principal fails to perform the contract with the Obligee. The benefits in the construction industry are fairly obvious. When a general contractor wins a construction contract, the property owner cannot be certain that the construction company will complete the project in conformance with the contract. Accordingly, the property owner requires the construction company to obtain a performance bond. The construction company will approach a bonding company and the cost for the construction company to obtain the bond will depend upon the construction company’s rating as well as the size of the job and the size of the bond. The bonding company, upon receipt of the cost of the bond and sufficient assurances from the contracting company that it can complete the job, will agree to guarantee the construction company’s performance of the job. Accordingly, the bonding company will agree to pay the property owner in the event that the construction company fails to complete work. This is what is called a performance bond.

A payment bond follows the same pattern, except that the bonding company guarantees that the construction company will pay all of its suppliers and subcontractors, not completion of the project as in performance bond.

In a maintenance bond, the surety guarantees that a contractor will maintain the owner’s property in an agreed condition for a specified period of time. If you are involved in a construction project, it can be very valuable to have an appropriate bond.

As with any contractual relationship, the terms of the bonding agreement are extremely important. Speak with an experienced lawyer about the terms and use a reputable bonding company.

If you need a assistance with obtaining or enforcing a bond, Gross & Romanick, P.C. can assist you. Contact us at 703-273-1400 or law@gross.com. Check out our website at www.gross.com.