If you are a construction business owner or investor, you may already be familiar with construction bonds. Construction bonds play a crucial role in the bidding process for construction projects, but also reflect how well a contracting business operates its business and achieves its profitability. Having a strong public reputation is not only essential for winning more projects, but also for attracting more skilled and talented employees.
What Are Construction Bonds? Construction bonds are a type of surety bond implemented prior to the start of a construction project. The acts as a guarantee to the investor(s) or project owner(s) that the construction project will meet the specific parameters outlined in the contract.
A surety bond involves three parties to participate:
Constructions bonds protect the investor/project owner against financial loss and delays, due to any errors, lack of project management or failure to abide by the agreed terms on the contractor’s part. Employees, suppliers, sub-contractors and other clients involved in the construction project are also protected under construction bonds.
Construction bonds are available in a variety of types as well. Here are some more commonly used construction bonds:
Bid Bonds Bid bonds are used during the tendering process to help increase a construction business’ chances of winning a bid. The bid bond acts as an insurance to the investor or project owner that the contractor will start and complete the project if they win the bid. Bid bonds also inform the investor/project owner that the contractor is financially stable enough to follow through with the construction project they’re bidding for. Bid bonds are generally priced based on the scope of work, amount bid for the projects and terms of the construction project.
Performance Bonds Performance bonds are generally what most people think of when you think of construction bonds. They protect the project owner/investor from any financial loss if the work completed by the contractor is not up to standards, quality or specifications agreed in the initial contract. The performance bond would cover the cost to redo or repair any work that does fulfill the agreed terms.
Payment Bonds Contractors use payment bonds to ensure their subcontractors and suppliers that they will be paid for their services and materials. They are used often used with performance bonds.
Why Are Constructions Bonds Important for Your Construction Business?
During the tendering process, investors and project owners will consider a number of factors when weighing your construction businesses over your competition. Aside from your bid price, offering a construction bond with your bid will reassure the project owner/investor that your business is financially viable and stable enough to carry out the work your business proposes in your agreement.
In order to qualify for construction bonds, the surety/insurance company must also evaluate the contractor based on their construction aptitude, resources, experience and reliability to carry out the specifications according to the contract. They also research a contractor’s financial statements, financial standing, credit rating and work history.
With such extensive research required to obtain a construction bond, investors/project owners can be confident that any contractor offering a construction bond is a legitimate and trustworthy company. Having a construction management software that helps generate bonding reports approved by surety companies will also expedite the bonding approval process for construction businesses. Jonas Construction clients can be confident that their Jonas generated reports are approved and readily accepted during the application process for construction bonds by Trisura Guarantee Insurance Company.
What is the Process for Applying for a Construction Bond?
Investors and/or Project Owners will often request for a construction bond prior to commencing a construction project to protect their investment. The process for applying for a construction bond can be quite lengthy and should be started as early as possible if you are unfamiliar with the application process.
To learn more about Jonas’ bonding reports approved by Trisura Guarantee Insurance Company, leave us a comment below or speak to one of our account representatives.