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How Bonds Work in the World of Construction

When a person or business invests in a construction project, they expect things to go as planned. But nothing is perfect, and a construction project could hit a few roadblocks. In an effort to plan for possible setbacks, investors make use of bonds that provide financial security. Here’s how bonds are used during different stages of a construction project.

1. An investor wants to begin a construction project. The investor puts out a call for construction companies to bid on the project. Each construction company that bids on the project must provide a bid bond.
The bid bond assures the investor that the construction company, if chosen, will complete the job as promised. The bid bond also includes the amount the construction company will charge for the project.

2. After a bid is accepted, the construction company must then submit a performance bond. This bond states the investor will receive compensation if the construction company fails to complete the job. Compensation will also be provided if the construction company’s work is unacceptable.

3. The construction company must also submit a payment bond. The payment bond covers labor and materials. It assures the investor that the construction company has the funds to pay for supplies, subcontractors, and construction workers.

When a Bond is Broken

Bonds are backed by a surety company that provides a line of credit to the construction company. If the construction company breaks a bond, then the surety company and the construction company are liable for the damages. The investor files a claim with the surety company to receive compensation for the setback.

The Benefits of Bonds

Investors and construction companies benefit from bonds. Bonds help investors decrease their risk of financial loss. And bonds help construction companies obtain projects they couldn’t get without bond backing. The bonds also help construction companies avoid bankruptcy should a project hit a snag.