Development of Construction Bond

Construction bond is a form of surety bond which is a mandatory for financial investors for large construction and federal construction projects. The principal has given the written statement that he will complete the entire contract according to the norms. He will complete the contract at no additional cost, in case the contractor fails to perform his obligation. Since construction bond is a risk management bond, it is not guaranteed that it will complete the construction projects. This bond will protect interest of the individual and other structure that the construction has been taken place as per contract.

Generally construction contractors are well known with the concept of securing surety bonds, but they do not know that they will create a relationship between the principal, the obligee, the surety.Construction lawyers, are aware of the legal rules and act of the principal, obligee, and surety, but they are not aware of knowledge of obtaining bonds. This article directs both contractors and lawyers.

A construction surety bond is a written statement that the contractor will perform His obligation as per bond. It guarantee that the principal will perform his obligation .if he fails the contract becomes void and he will sued in the court for further actions.Construction bond is otherwise called condition bond. If the principal fails to perform his obligation, both the principal and the surety will be asked to pay penalty amount.Construction surety bond are of different types like bid bond, performance bond, payment bond.

Bid bond: A bid bond is a written statement which guarantees to the obligee that the principal will offer his bid, as awarded in the contract. In this type of bid, both principal and the surety are sued, in failure of their contract. They have to pay the additional expenses incurred by the obligee for breaking of contract. The penalty amount will be ten to twenty percent of the contract. If the principal refuses to bid the surety has to undergone the risk.

Performance bond:

This bond guarantees the obligee that the contractor will finish his contract as per terms and condition relating to time and price. The obligee is the owner of the contract and he may sue the principal and the surety, in failure of the contract. If the principal fails, he may ask the surety to perform or complete the contract. The surety has his choices of completing the contract, either with his own construction contractor or selecting another contractor to complete the contract or paying the additional cost to the owner, to complete his contract. The penalty amount paid by the principal and the surety will be amount of construction contract. If the surety himself constructs the contract with his own contractor then the penalty amount will be nullified. Here the surety has to take the full risk of constructing the contract without loss of time and money of the obligee, I.e the owner. Performance bond usually protect the interest of the owner against any fraud or misrepresentation.

Payment bond:

In this type of bid, the obligee i.e the owner will give a written statement to the principal that he/she will pay the contract amount has mentioned in the bond without fail. This bond protect the principal against risk, in case of failure of the contract by the owner. It also ensures that the subcontractor and the suppliers also act as per contract. In case of failure of contract the principal may sue against the obligee or he may Break the contract.

Supply bond:

It is a bond created between the principal and the suppliers or subcontractors, that they will supply the material or completes the contract with in stated period as mentioned in the contract. It protects the principal against loss of time and value.

Construction bond has its merits and demerit.

Merit of construction bond:

  • It ensures the obligee that the contract will be completed within stated period.
  • The principal ensures that he will finish the contract as per norms.
  • It improves the reputation of the constructor or the contractor.
  • It improves the quality & quantity of work

Demerits of construction bond:

  • If contractor fail, the accountability of completing the contract, belongs to the surety.
  • Once contract has been signed, then no one can break the contract, though the contract not taken place under legal procedure.

Construction bond ensures proper completion of contract with in stated period.Thus construction bond protect, both the principal and the obligee. Here the full risk as been undergone by the surety. Incase if failure on both the side he has take the risk.