Everyone expects that the person they hire should complete the assigned job. But there can be instances when that job is not completed as intended, or not completed at all. A surety bond binds the contractor taking up the project to deliver what he committed to do. In case he doesn’t, the surety bond compensates the loss incurred by the project owner, charging the contractor for the same later.
Understanding Performance Bonds
Performance Bonds ensure optimum performance by the contractors throughout the project duration. These bonds are the most commonly used surety bonds for public work contracts that have an estimated value of $100,000 or more. However, that is only one of the conditions for issuing them. These bonds can also be used for managing company operations that may not be bound by this cap. Bidding could be done initially, post which the winning contractor has to furnish a performance bond as a guarantee for successfully completing the project.
These bonds create a win-win situation for all, bringing lucrative contracts for contractors and ensuring highly satisfying results for the project owners.
How Performance Bonds Work
Performance bonds safeguard the interests of the project owner if a work is not done satisfactorily or if the contractor has defaulted deliberately or even unwillingly. Since this risk of default is always there, surety bond institutions (banks/insurance companies/private lenders) run an extensive check on the contractor’s history before issuing the bond. They take into account his past experience, risk capital, financial statements, and more. Under the circumstance where the contractor’s history doesn’t seem credible enough, he is not issued the bond, thereby denying him the chance to win a contract too.
This way, there is a very little scope for a miss to ever happen. And if it happens, the surety bonds take care of the losses. There are rarely any government or private projects involving large investments that happen now without performance bonds.
Commercial bonds are required for licensing by commercial enterprises and professionals. The bond is meant to ensure that the principal follows the rules and regulations of the industry and the government. If you need a commercial surety bonds Florida, you can purchase one from a surety company by following these steps:
– Decide on the type of commercial bond you need
There are many types of commercial bonds, such as a contract bond, non-contract bond, license & permit bond, bid bond and more. The bond required will depend on circumstances. Some bonds are required as part of a bidding process or a contractor contract. First, you need to know the type of commercial bond you require.
– Look for a surety company
Finding a reliable surety company is pretty easy with a simple web search. But it’s important that you look for the right company. Look for a company that specializes in commercial surety bonds Florida and has a good credit rating. The credit rating of the surety company will reflect on your own credibility.
– Fill out the form
Most surety companies today take applications through their website. You can simply fill the form and submit it, along with the required supporting documents. You will have to submit financial documents like bank statements and balance sheets. Your application will then be assessed by an underwriter and background checks will be done. Finally, if your application is accepted, you will have to pay the bond cost to buy the commercial surety bonds Florida.
If you are a contractor bidding for a construction project in Florida, chances are that you have heard of payment bonds. Most government projects will ask for a Florida payment bond as part of the bid condition.
What is a payment bond?
A payment bond is a type of surety bond and like any other surety bond, it has three parties:
– The Principal: The contractor who is required to buy the bond.
– The Surety: The surety company that sells the bond.
– The Obligee: The project owner who is asking for the bond.
The payment bond guarantees that the contractor will pay subcontractors, material suppliers and workers on time. It is usually required along with a performance bond and is submitted when the contractor wins the bid to the project.
Why do we need payment bonds?
To make sure everyone is paid on time: The payment bond makes sure that there are no delays or fraudulent behavior by a contractor when making payments. Without the bond, the project owner could become responsible for those payments.
To reduce disruptions: The completion of any construction project depends on timely payment of workers and material suppliers. Delays can cause unrest or stall a project for a prolonged period, resulting in huge losses for the project owner. The framework to ensure timely payment reduces the chances of such disruptions.
To protect against loss of reputation: While it is the responsibility of the contractor to make these payments, it is usually the project owner that is ultimately responsible. When the project owner is a government body, this is highly undesirable.
Fixing liability: The Florida payment bonds fix the liability on the contractor.
Contractors commonly are required to have bid bonds, performance bonds and payment bonds. If you work as a contractor, sooner or later you will need to be bonded. It’s important to pick a reputable contractor bonding and insurance company. Here’s a simple primer on picking the right company:
Do your research: There are many bonding and insurance companies to pick from. You can do some online research and ask your peers in the industry for their recommendations. Make sure you go through the insurance companies’ websites and understand their terms and conditions.
Check credit ratings: Just as the insurer will check your credit ratings, you should also check the insurer’s rating. Their credit rating will affect your own position. If you submit a bond from a company known for unreliability or dishonest practices, your application may be rejected. Check the ratings given by independent agencies that score bonding companies.
Licensing: Make sure the contractor’s bonding and insurance company is licensed to operate in your state. If you are working in more than one state, go with a company that is licensed in all the states you are operating in. Many bigger companies will have multi-state licenses.
Treasury listing: Bonds are most frequently required for state or federal projects. A treasury listing, commonly known as a T-listing, means that the company has the approval to write bonds for federal projects. A T-listed bond also acts as an automatic check for its reliability.
To be approvedfor a T-listing, a company goes through rigorous scrutiny from the U.S. Department of the Treasury.
Bond capacity: If you are dealing with multiple bonds, the bond capacity of the contractors bonding and insurance company becomes critical. Every company will have an aggregate bond limit beyond which it cannot issue bonds. If you need multiple bonds across different states, the aggregate limit becomes very important