Project owners hire general contractors to execute their construction project. It is important that the general contractor completes their work to the agreed-upon specifications and on time, so the project owner does not suffer financial losses related to the wrongdoing or delay. Surety bonds are a critical component in ensuring this is done.
Surety bonds in the construction industry
In most construction projects, the general contractor will acquire a surety bond from a third-party surety company.
If the general contractor breaches their contract with the project owner, the surety company must either procure a new general contractor to finish the project or provide the project owner with compensation for any financial damages suffered due to the breach.
Advantages and disadvantages of surety bonds
Surety bonds protect project owners by ensuring their project will be completed and that they will be compensated if a contractor’s breach causes financial damages. Surety bonds can also incentivize contractors to do their best to adhere to the contract.
However, contractors are charged high fees for surety bonds and some surety companies ask for collateral before they will provide a surety bond. This can increase project costs.
Risky projects may not be eligible for surety bonds. Also, small businesses may be priced out of obtaining a surety bond, leaving them on the hook for a breach.
Surety bonds mitigate risk
Surety bonds mitigate the risk that a project owner will be stuck in a bind if their contractor does not perform per the terms of the contract. However, surety bonds can add to the overall cost of the project. Still, many project owners find it valuable to hire contractors who are able and willing to obtain a surety bond.