A bond is the guarantee of one party for the performance of another. Construction bonding is essentially a three-party contract between the principal (the contractor), the obligee (the owner), and the surety.
In a real sense, the first purpose of a bond is to identify the actual ability of a contractor to get one. This ability tends to separate unqualified contractors out of the process. Before any surety guarantees the performance of any general contractor, it will have conducted the most intrusive and detailed investigations of the contractor’s financial strength to carry the type of work contemplated, and of its management ability to deal with all factors of production. The company principals will personally have had to demonstrate absolute commitment to the surety for its actual performance by providing large amounts of financial security to back its promises of performance and competence. Nowhere else is it more true that a bonded contractor has “put his money where his mouth is.”
Finally, it is important to note that every bonded contractor will have a profound, sober understanding that if it ever needs to rely on a surety to cover performance, it will be the one and only time. The contractor not only risks the security provided for the bond, but will in all likelihood be unable to get another bond. Except in the most unusual circumstances, the contractor will effectively be on the way out of business—or at least out of its ability to bid bonded work.
There are many types of bonds. As related to general construction contracts, the prevalent ones are bid, payment, and performance bonds.
Post your comment on this topic.