It is common to use a surety in construction. Surety Bonds ensure that a contract will be completed successfully in the event of a default by the contractor. Developers and builders need to understand the legal rules associated with sureties in construction projects in order to protect their financial interests. A Scottsdale Arizona real estate lawyer can provide assistance with all aspects of a Surety in Construction.
What is a Surety in Construction?
There are four primary types of Surety Bonds used in the construction industry:
- A Bid Bond ensures that a contractor who makes a bid will fulfill his obligations if awarded the bid. The Surety is pledged with the bid and guarantees that the bidder will enter into the contract if selected. Bid Bonds may be required of developers or construction companies who bid to complete public projects. Federal construction contracts require a Bid Bond for projects valued at $150,000 or more. Many local and state municipal governments have similar requirements. When the contract is awarded, the developer generally will be obliged to provide Payment and/or Performance Bonds.
- A Payment Bond ensures that subcontractors and suppliers receive payment for work performed. This protects owners of property, who otherwise could find their property subject to a Mechanics Lien if the subcontractors or suppliers were not paid in full.
- A Performance Bond ensures that a contractor or construction company will complete the terms of the Contractual Agreement, complying with substantially all provisions of the Agreement.
- An Ancillary Bond ensures that any requirements integral to the performance of the contract will be carried out even when those requirements are not directly related to performance.
A Surety in Construction may be required for both public and private construction contracts. Surety companies, which are typically subsidiaries of insurance companies, offer bonds for purchase. Unlike traditional insurance, which determine premiums using actuarial data about expected risk versus expected loss, Surety Bond issuers pre-qualify contractors based on construction expertise and financial strengths. In that sense, Surety Bonds are more like issuing credit than issuing insurance. There is little expectation of loss when bonds are written.
Developers, owners, contractors and construction firms should all carefully consider factors related to a Surety in Construction to determine what is appropriate for a specific project. A Scottsdale Arizona real estate lawyer can provide comprehensive advice on Surety Bond purchases and Surety requirements. An attorney can also help to make a claim against a bond if problems develop during construction. Contact Lotzar Law Firm, P.C. today to learn more about different Surety Bonds and their role within the construction industry.
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