Not sure what a surety bond is or why a particular construction company would use one? Find it out now.
If you are about to hire a construction company for a job, you may have heard that you should also make sure the company you hire has a surety bond.
Not sure what a surety bond is or why a particular construction company would use one?
If so, here is a quick explanation of the role of a surety bond as well as why a good construction company should never start a new job without one.
What are surety bonds? — This is an assurance that the company putting up the surety bond, usually an insurance company, believes the construction company you are going to hire is not only capable of doing the job but will also complete it in the time needed.
If this does not happen, the construction company collapses mid-way through the project or cannot complete it anywhere near the time you need, then the company issuing the surety bond pays for the completion of the project or the damages you have incurred.
Why do construction companies use surety bonds? — Most construction companies that use them do so because it gives the company a lot more legitimacy.
After all, with so many construction companies going bankrupt mid-way through jobs or not being able to complete them in the time needed, if a company has a surety bond it makes the would-be client much happier about hiring them.
With a surety bond, the construction company is also less likely to go bankrupt and more likely to complete the job on time and within the budget.
This is because, in order to be able to get a surety bond, most insurance companies ask for indemnification from the owner of the construction company. Once indemnification has been handed over, the company’s owner does not want to lose it so will do everything in his power to make sure the job is completed and under the specifications you wanted.
How can a surety company prevent a job from not being completed? — Another wonderful thing about a construction company with a surety bond is that the insurance company does not want anything bad to happen with the job either. If it does, they can lose a huge amount of money on a failed construction project.
So, if they do feel like the job has a chance of collapsing or the construction company going bankrupt, they will sometimes offer technical help to them to try to get them back on track.
If that does not work, they may send a construction manager to try to rein in the project and get it back in track. If all else fails, then an insurance company may even offer financial help as an incentive for the construction firm to finish the job.
What happens if the job or the construction company does collapse? — If the firm you have hired does go bankrupt or has problems completing your construction project, you should contact the insurance company that issued the surety bond.
They will then make sure the job gets completed in the manner that was first agreed upon.