What is A Construction Bond?
Construction bonds are performance bonds that are used in the construction industry. A construction bond provides the project owner with the security that a project will be completed in the event of the failure of the contractor that was employed to build the project. The risk that a project is delayed or not completed is transferred to an insurance company or surety by the project owner
Why Do You Need a Construction Bond?
If you are involved in the construction industry, you may be required to purchase a construction bond as part of a construction contract. This bond will protect the owner of a project in the event that your contract is breached due to a contractor’s failure to perform the contract, usually due to the financial failure of the contractor. Construction bonds are a requirement of almost all government and public construction projects.
Many construction contracts in the UK include a stipulation that the contractor must acquire a construction bond. It is the contractor who must purchase the bond, rather than the project owner who is the protected party.
How Much Will A Construction Bond Cost?
The cost of the bond is usually paid by the contractor, but is taken into account in the tender price offered to the client.
The cost can vary significantly, in a similar way to a performance bond (based on the contractor’s financial position, existing workload, the work to be carried out, history and other factors).
How Does A Construction Bond Work?
A bond is purchased by a contractor from an insurance or surety company, and provided to the project owner.
In the event that a contractor fails to perform the work to the standard of the contract, the project owner can activate the bond for compensation.
Most bonds in the UK are “conditional”, which require the project owner to provide evidence that the terms of the contract were not met. Elsewhere in the world, more bonds might be “on-demand”, which have much less stringent requirements on the client.
On large projects, there may be multiple bonds for multiple involved parties. For example, the subcontractor who supplies materials to the main contractor might also be the principal in a secondary bond.
See our explanation of surety bonds for more details about the parties involved and their roles in a performance bond.
Any other questions?
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