Why Do Contractors Require Construction Bonds?

admin

9 years ago

There is truly an abundance of construction contractors out there in Canada and many of them fail to see the importance of construction bonds. The truth of the matter is that they’re greatly important and are actually required. Before rushing ahead and attempting to obtain your bonds, you should learn precisely why they’re important and why they’re required! Within this guide, you’ll be able to do just that.

Protects Both Parties – The Obligee & The Principal.

When it comes down to it, construction bonds are essential, because they protect both sides of the transaction. Many contractors only see it from the eyes of the client and fail to recognize that this surety is also protecting their investment and time. Although the client is generally on the winning end, both sides of the transaction benefit immensely. Even if they’re not required, it is almost certain contractors would still obtain them anyway.

Adds Legitimacy

If bonds were not required, it would be possible for anyone to step into the industry and offer their services. Although bonds may limit competition to a narrow degree, this is ultimately a good thing. This is the case, because companies should be legitimate and trustworthy. With bonds, it is possible for contractors to legitimatize themselves and show their worthiness. It is the process of applying for construction bonds that separates the average contractors from the big guys capable of taking million dollar projects.

Guarantees Follow Through

Whether you’re investing in a payment bond, bid bond or performance bond, you should understand that these bonds set your actions in stone. Without these bonds in place, the contractor could jump out of the agreement at any point in time and this would lead to a major headache and dilemma for the client. Without payment bonds, the contractor could walk away and leave the subcontractors scrapping for pennies. Simply put, these bonds are required, because they help to solidify the future and force both sides of the arrangement to follow through, until the very end.

Bid Bonds

Of course, the reason for the requirement varies from one construction bond to the next. In order to figure out precisely why each is required, it is imperative to break down each individual bond. First, you have the bid bond. This one is generally required, when the contractor places their bid on the contract. As mentioned above, it is used to add legitimacy to the contractor and helps to reinforce the bid.

If anyone was able to place a bid, without a bond, someone could easily win the contractor and then fail to obtain the subsequent bonds in the future. This would be problematic for the client, who would then be left in limbo and likely forced to restart from the bidding process.

Performance Bonds

Although bid bonds help the contractor obtain the job, the performance bond is even more vital and better protects the client’s investment. Jobs, which require bid bonds, will almost always require bid bonds. Once the bid has been accepted, you will need to immediately provide a payment and performance bond. Both are typically required and are generally given as a favor to the client. This bond is so incredibly important and required because it helps to ensure that the contractor will live up to their end of the bargain.

If this type of bond were not in place, any individual would be able to establish their own company and carry out projects, without any reassurances to the investors. Suffice to say, this would be simply too risk, so the performance bond is a necessity.

Overall

When it comes down to it, obtaining bonds is absolutely vital for the contractor, subcontractor, and especially the investor. Whether or not these individuals would obtain the bonds and live up to their expectations, if they were not required, remains to be seen. With this in mind, it is generally best to err on the side of caution and make the bonds a requirement.