Nowadays, much more is required to ensure a complex construction job will not only be completed, but also that all parties will be compensated. In the construction industry, the most commonly known and secured bonds are performance and payment bonds, which are required by owners, also known as the obligees, on public projects and sometimes on private projects to ensure the work will be completed.
The performance bond provided by the surety on behalf of its contractor client, also known as the principal, guarantees that the surety will complete the performance of the contract should the contractor be terminated. The payment bond guarantees payment to subcontractors and suppliers.
What can be easily overlooked are the other bonds that a contractor may need. Some of these bonds are project specific, and some are general use.
Wage and Welfare Bonds
In states where a contractor employs union workers, it may be required to provide a wage and welfare bond to the union to guarantee the payment of wages or fringe benefits. These bonds are financial guarantees, and the surety will underwrite them more cautiously.
Transactional Commercial Surety Bonds
A contractor also should consider transactional commercial surety bonds, such as contractor license bonds, business services bonds and out-of-state contractor tax bonds. Having a strong understanding of the requirements and risks associated with those bonds can help the contractor better interact with its surety and ultimately facilitate the approval of these various bond types.
In addition, contractors should consider subdivision or completion bonds. States, cities or towns require these bonds when a project will impact public infrastructure. The bond guarantees the infrastructure will be restored to its original condition. In some instances, such as home subdivisions, the bond guarantees that infrastructure will be built and turned over to the public entity.
Subdivision bonds take many forms and may be called different things, but they basically have the same function: The principal (contractor or developer) is obligated to perform, yet the obligee does not have responsibilities (i.e., payment) because no contract is in place between the two parties. Many risks are associated with these bonds, including duration. These bonds do not expire and are only released when the obligee accepts the work, which can sometimes drag on for years. Another high risk is payment. The obligee does not have a contractual relationship with the contractor, so it can make a claim for unfinished work despite not paying for the work.
When a developer requires a contractor to provide the subdivision/completion bond, there is a contract between both parties wherein the contractor gets paid for doing the work covered by the subdivision/completion bond. The risk here is there could be a contractual dispute between the developer and contractor resulting in stoppage of payments for work. The obligee under the subdivision/completion bond does not care that the contractor is not being paid. He or she can force the contractor to complete the work regardless of payment.
Other subdivision/completion type bonds include: street permit, road opening, and license and permit. A city or town requires these bonds when a contractor is doing work that would impact a road, sidewalk or other public infrastructure. The obligation guarantees that the public infrastructure will be restored to its original condition. These bonds do not expire, so a contractor will have this exposure to the public obligee until the bond is released. Because these bonds are generally smaller in nature, surety companies are fairly quick to approve them.
There are numerous types of bonds to consider depending on the size and scope of a project, and these are just a few that are often overlooked. Be sure to work with a carrier that has the expertise to provide the right bonds for the company’s needs and offers a full range of surety bond solutions. In addition, the carrier should have strong financial ratings with a T-listing greater than the largest single bond the company will need.
Antonio Albanese is vice president of surety for Nationwide. For more information, email email@example.com.