In general, there are different types of contractor’s bonds that you need to have before signing to undertake a certain construction project. These bonds include; Bid bonds, a licensing bond, a performance bond, and a payment bond but not limited to this list only.
A well-defined performance bond is a tool to ensure financial assurance that a project will be implemented in accordance with the owner’s expectations, regardless of the contractor initial conditions. For instance, the contractor may fail to execute the work according to the agreements signed in the contract acceptance documents, the guarantor who has signed a performance bond has the authority to make payments to another contractor to finish the project. Performance bonds are ordinarily used in property development where the clients or investor may require a supplier or contractor to ensure that project managers receive such securities to ensure that labor costs are not lost in case of the project failure.
A payment bond is used if the project has no adequate money so the client will pay the contractor according to the amount of work completed but not the whole project. The client may subtract contact another contractor after they get more money. The payment bond guarantees that the client pays for the work and material which the project has consumed up to that level. In case a payment bond had not been acquired and if such subcontracting fees are not paid, the owner who has paid to the Contractor may be confronted with subcontractor’s liens or against a completed project.
Contractor’s License Bonds
Contractors are required by law in many countries to be issued with a contractors license so that the clients can check the contractor’s ability to perform a certain project before accepting that contractor to undertake the project. Bonds of this type generally pay for property damage caused by mismanagement of materials or theft of projects tools as result incapability of the contractor’s company to provide security of these items.
Bid Bonds – Provide the clients with a guarantee that the Contractor has tendered a bid and they have disclosed all material information that can be used in legal cases and they have done it good faith. This means they will execute the project without such intention extending the time for implementing the project or the project price and has the ability to obtain the requested amount.
Bonds are tools that provide financial assurance when a construction project is not implemented as per the first plan. If the Contractor leaves work or they become insolvency, this contractors bonds will cover this amount up to the amount of the guarantee.