The construction industry is fraught with risks. Contractors might accept a bid and then vanish, abandon the project midway, or subcontractors could sue if they aren’t paid. How can you shield yourself from the numerous liabilities that come with hiring contractors for a project?
Bonds ensure that construction projects reach completion, protecting the financial interests of project owners while offering enhanced security for all involved parties. Bonds come in many varieties, though, so how can you tell which type you should invest in? Let’s review how bid bonds, payment bonds, and performance bonds differ.
Why Might Construction Project Owners Use Bonds?
While you may like to, you cannot always rely on contractors to deliver projects exactly as planned. From supplier delays to on-the-job risks and permit bottlenecks, many things can go awry. As a construction project owner, you don’t want to be liable for the mistakes a contractor makes.
Bonds are key financial instruments that offer payment protection in this sometimes unforeseeable industry. Project owners can use bonds to ensure contractors deliver quality work and fulfill their obligations.
If a contractor violates bond terms, you can open a claim to seek compensation for your financial losses. In many cases, though, the requirements that come with bonds simply encourage contractors to deliver error-free quality.
Differentiating Common Construction Bonds
Bid bonds, Payment bonds, and Performance bonds protect parties from the various risks that may arise when investing in construction ventures. Let’s see how they differ so you know which type of bond you need for your next project.
Bid Bonds
Bid bonds protect project owners from bid violations that can occur when a contractor secures a contract but later denies it because they cannot meet its requirements. Maybe they submitted a low bid for a project but later found out they could not afford to take it on. This type of bond ensures that if a contractor wins a bid, they will accept the project or be liable for acquiring the funds to locate a replacement contractor.
Bid bonds help you ensure that contractors are actually serious about the project at hand, so you don’t waste time with people who will drop out at the last minute. If you require contractors to secure bid bonds, you generally know they will have the financial means to assume the project.
Performance Bonds
Once a contractor accepts a bid and begins work on a project, a Bid bond is replaced with a Performance bond. Performance bonds ensure contractors meet the obligations defined in their contract, including timeline and quality expectations. A performance bond may protect the project owner from the contractor failing to see the contract to project completion, the contractor using unsuitable materials, etc.
If a contractor does not perform according to their contract, a project owner can make a claim on the Performance bond. Performance bonds allow project owners to claim compensation for lapses in quality. In many cases, though, performance bonds set a higher quality standard, ensuring that contractors stay 100% committed to the project.
Performance bonds may be required for expensive government projects. They can be a good idea for any project requiring significant time or monetary investments, as they ensure things pan out as you envisioned.
Payment Bonds
Payment bonds are usually issued along with Performance bonds. While a Performance bond ensures the project owner can be compensated should the contractor fail to perform, a Payment bond ensures that suppliers and subcontractors are paid should the contractor fail to pay them. Your suppliers and subcontractors all need payment for their services, and if they aren’t paid, you may face legal ramifications. Payment bonds protect project employees, ensuring that contractors issue subcontractor payments correctly, in full, and on time. If your contractor fails to do so, they’ll be on the hook for the missing payments.
What’s Right for Your Project?
Bid bonds, payment bonds, and performance bonds all serve varying functions, so you do not need to select just one to protect your interests. Each type protects project owners in different ways while preserving subcontractor rights and client needs.
We recommend considering the costs and timeline of your project to weigh the risks you’re willing to take. While all three bonds may not be required for smaller projects, they can still serve as vital risk management tools, ensuring financial protection.
Do You Need Help Navigating Bond Requirements?
At Anderson Jones, PLLC, we can help you determine the right coverage for your project based on bonding requirements, potential risks, financial investments, and more. Whether you need help disputing a bond claim, opening one, or anything else, you’ve come to the right place. We’re highly experienced in construction litigation and are fully prepared to help you navigate everything from bond issuing to contract drafting.
If you’re a contractor facing a bond claim or a project manager hoping to protect your financial interests, you’ve come to the right place. Call Anderson Jones, PLLC, today at 919-277-2541 to speak with our construction attorneys about bid bonds, payment bonds, and performance bonds.