Bonding may sound like just another layer of red tape that’s necessary for large projects, but it can actually benefit your company in a variety of ways. The article below will break down what it means to get bonded in construction, including how it works, how it helps, and why it’s so important.
Bonds are an agreement between three parties: the principal, the obligee and the surety. The principal is the builder who agrees to complete a project, the obligee is the project owner and the surety is the financial guarantor of the bond.
Getting a bond requires a significant amount of information from the contractor, as well as from the surety company. The company will evaluate the builder’s business and financial stability, as well as their experience in the industry. They will also want to see financial statements, such as a balance sheet, an income statement and a cash-flow statement.
The bonds are designed to protect the project owner from loss if the principal fails to meet their obligations under a contract. This type of protection became a standard feature for many government project managers after builders were accused of bidding low to win contracts and then not finishing the work or paying their subcontractors, suppliers and employees. In this way, bonds shifted the risk from taxpayers to the builders. As a result, most large public and private construction projects require builders to be bonded.