How Important Are Construction Bonds?

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In the construction industry, most development projects, especially government projects, require surety bonds for companies even for preliminary bids. In today’s competitive construction market, acquiring construction surety bonds can help an organization get ahead of competition. There are three parties involved in a construction bond. First, the obligee (government or public acting as a beneficiary for which the work is being performed), the principal (contractor performing work for the obligee), and the surety agency (bonding company that guarantees that the principal will perform the job for the obligee as per the contract).

Generally, all federal construction projects beyond $30,000 require payment protection and all projects above $100,000 require performance bonds and payment bonds. If there is no construction bond in place, these subcontractors may not be able to afford the risk of losses from non-payment.

Therefore, construction bonds are vital because the contractors are more likely to complete bonded projects than non-bonded projects. In addition, bonding capacity can greatly increase a contractor’s or subcontractor’s project opportunities.