In this article, our experienced construction bond lawyers explain the basic principles governing this complicated aspect of most projects.
What is a Construction Bond?
A construction bond is a three-party agreement that makes assurances with respect to specific obligations on a construction project. The three parties are typically an owner, also referred to as the “obligee”; the principal, often referred to as the general contractor; and the surety company. The obligee can also be a general contractor, in which case the principal is a subcontractor.
How Many Different Kinds of Construction Bonds Are There?
There are two main types of construction bonds. One is a “performance” bond, which typically assures the owner (or general contractor, as the case may be) that a bonded project will be completed according to plans and specifications in a bonded, written contract or subcontract agreement. The other is a “payment” bond, which assures subcontractors and suppliers that their pay estimates, or invoices, will be paid in accordance with their written subcontracts with the general contractor. Agents, brokers and surety companies often refer to these as “P&P Bonds.”
Another type of bond is a “bid” bond. A bid bond gives assurance to owners or general contractors that a contractor’s or subcontractor’s bids are serious. The consequence of not signing a contract, once awarded, and providing payment and performance bonds required by the contract, is a claim against the bid bond for the penal sum of the bond. The penal sum of a bid bond can be as low as five percent of the bid, or tender amount, and can be as high as ten percent If you find yourself in a bid bond dispute, you may be able to raise a defense based upon mistake, defective drawings, defective plans and specifications, and other contract formation and reliance issues. An experienced construction bond lawyer can advise you as to any possible defenses and help you to avoid or mitigate a loss in such a situation.
Another type of bond is a “supply” bond. This type of bond guarantees a supply of a particular product or material, with or without delivery to a project site. Sometimes a supply bond contains performance aspects that resemble the wording of a performance bond and obligate the supplier and its surety to much higher exposure on a project. If you have any question about your obligations under something called a supply bond, especially if you are facing claims that you did not anticipate, consult with an experienced construction bond attorney early to discuss your options and possible defenses.
How Does a Construction Bond Differ from an Insurance Policy?
A construction bond is issued by a surety or bonding company. Surety companies are often owned by insurance companies, and the name of the surety company often has the word “insurance” in its name. That is, theoretically, the closest connection between surety and insurance. Whereas surety is a three-party agreement, insurance is a two-party agreement between an insured, or policy holder, and the insurer, or policy issuer. Also, a predicate to the issuance of a construction bond is the execution of an indemnity agreement by the principal and others who are willing to be financially obligated to the surety for the default of the principal in the event of a claim against the bond. There are no such indemnity agreement requirements before one can obtain insurance.
If you have any questions about this complex area of the law, reach out to our experienced construction bond lawyers before you sign anything. You can reach us by phone or by email.