When you’re starting out in the construction industry, getting a construction bond is vital to ensure that your property is protected. By using this form of protection, you can cover costs for repairs and damages incurred during the course of the project. These costs may be covered by the insurance policy and by the company that provides the loan.
Learn the important reasons why you should have a construction bond for your project by reading below.
What Is A Construction Bond?
A construction bond was developed by John G. Lechmere as a means to insure the quality of a particular product that was used for construction purposes. This idea was later adopted and refined by the U.S. government, which then became a standard practice for securing public contracts.
A construction bond offered by Netsurance Canada refers to a type of surety bond that’s used by construction project investors. The primary purpose of this bond is to protect the investor against financial loss or disruptions if a contractor fails to complete or deliver the desired output or specifications of a project.
Here are the following parties in a construction bond:
- Obligee: This term refers to the investor or project owner. The obligee or project owners should require all contractors to have a bond. Usually, the contractor with the lowest bid price will be selected to handle the project.
- The Parties Building The Construction Project: These refer to the contractors and subcontractors.
- The Surety Company: This pertains to the company that backs the construction bond.
Now that you know what a construction bond is all about, it’s time to discuss the importance of a construction bond for your project.
- You Don’t Have To Pay For Expensive Insurance Policy
The first benefit of this type of financing is the fact that if something goes wrong during the construction period, you don’t need to pay for an expensive insurance policy. Instead, you can rely on a single source of funds, which is the construction bond, to cover any and all expenses.
However, it’s important to ensure that the amount of the loan is sufficient to cover all possible costs.
- Allows Access To A Variety Of Finance Sources
The next reason to get a construction bond is that it’ll allow you to access finance from a variety of sources. Having a construction bond allows you to borrow money from various providers without having to choose between them since lenders are confident that your investment is protected.
The loan may be from a variety of sources, including your own savings, your business, a financial institution, or any other source you choose.
- Provides Assurance Of The Contractor’s Compliance To Agreement
A construction bond provides you the assurance that your chosen contractor will complete and deliver your project according to the terms specified in the agreement. For instance, if the specification of the roofing, foundation, or plumbing system was not followed and repairs or replacement is needed, the construction bond will cover the expenses.
The amount of funding that can be obtained through a construction bond depends on how large the job is, how many subcontractors will be involved, and the complexity of the project. For example, a simple project that involves changing the windows will require a smaller amount of funds than a complex project that includes tearing down buildings or installing new electrical systems.
- Protection Against Non-payment Of Labor and Materials
A construction bond also offers protection against non-payment of labor from subcontractors and materials from suppliers and labor from subcontractors.
If ever the contractor fails to make full payment of construction supplies used in the project, the investor won’t need to pay out of their pocket because the construction bond will take care of it.
- Covers Various Risks In A Construction Project
Construction bonds can be used to cover various construction problems and risks involved with building projects, including property damage due to flooding, earthquakes, fires, equipment failure due to malfunctioning, or vandalism. They can also cover problems such as improper foundation repair, electrical safety problems, excessive wear and tear on machinery, or other technical failures.
- Provides Investors Peace of Mind
Investors want to ensure that their construction projects will go smoothly as planned and any delays, disruptions, poor productivity, or untoward occurrences are minimized and covered.
By carrying a construction bond, project owners are more confident and assured that they won’t be liable for anything that goes out of plan.
A construction bond is a crucial aspect of any project. It provides a high level of protection against financial losses and stress associated with contractors’ negligence, lack of skills, inadequacies, and delays. This surety bond is also a requirement by investors to provide them peace of mind and confidence to entrust their investments to qualified contractors.
Construction bonds can be a form of protection from losses or delays caused by a professional contractor’s non-compliance or failure to fulfill project specifications. In a business setting, this can also protect the lender from damages or delays caused by the use of unprofessional materials or practices.