Why Surety Bonds are Important for Contractors
Construction is an industry that already comes with inherent risks. From the physical issues that construction companies have to worry about, such as injuries and fatigue, to the fluctuation of the industry itself, those in construction have a lot to keep their eye on in terms of keeping business afloat.
Construction business owners, be they public or private, can’t afford to operate on shaky ground around going bankrupt, hitting a stall in business, or facing major legal battles. What’s more, even hiring low-bid contractors can cause a potential mishap if that contractor isn’t dependable in the long run.
So, how can a construction company ensure they are protected from any of the variables that can lead to a major bump in the road?
Surety Bonds
One way companies can operate with some sort of protection is by investing in local insurance options. CT contractors insurance for surety bonds provides financial security and construction assurance on projects by protecting project owners from contractors that are hired to perform the work, and pay out their subcontractors, laborers, and material suppliers.
A surety bond is a risk transfer mechanism where one party will guarantee another that a third party will follow through on a contract. This three-party system includes three types of bonds that a company can invest in. They are the bid, performance and payment bonds. Here’s a closer look at them:
- The Bid: The bid bond provides financial protection that the bid has been submitted in good faith and that the contractor will enter into the contract at the price bid. This bond also means that the contractor will provide the required performance and payment bonds.
- The Performance: This kind of bond protects the project owner from financial loss if the contractor fails to follow through on a contract and perform the contract in accordance with its terms and conditions.
- The Payment: The payment bond will guarantee project owners that the contractor will pay certain subcontractors and laborers associated with the project in question.
Financial Security
Surety bonds are mandated by law on public works projects. But the use of surety bonds on privately-owned construction projects comes down to the owner’s discretion. There are alternative forms of financial security, such as letters of credit, and self-insurance, but they don’t cover the risks that are inherent in construction as well as surety bonds do.
For this reason, surety bonds are increasingly becoming more of a requirement by project owners. With a surety bond in place, the project owner can operate knowing that a risk transfer system is in place, shifting the risks away from the owner to the surety.
Contractor Issues
Probably the biggest issue that project owners run into is the failure of a contractor to not only perform the work they’ve been contracted to but stay in business throughout a project. Surety bonds are dependable and proven, providing a reliable form of protection against contractor failure. They usually cost between one and three percent of the total contract price. On larger projects, surety bonds may cost even less than one percent.
Surety bonds reduce the possibility of a contractor diverting funds away from a project and provide an intermediary (the surety) for the owner to air any complaints. They also help by lowering the cost of construction in some instances by facilitating the use of competitive bids.
About Byrnes Agency
At Byrnes Agency, we offer insurance solutions that can be tailored to meet your specific needs. Whether you’re looking for personal policies or commercial coverage, we have the right coverage for you. To learn more about our products, contact us today at one of our two locations.
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Phone: (860) 774-8549
394 Lake Rd
Dayville, CT 06241
United States
info@byrnesagency.com
Hours of Operation: Monday- Friday 9:00am-5:00pm
Phone: (860) 886-5498
6 Consumers Avenue
Norwich, CT 06360
United States
info@byrnesagency.com
Hours of Operation: Monday- Friday 9:00am-5:00pm
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