Benefits Of Getting A Performance Bond For Your Next Home Renovation Project
RH Business Marketing Solutions
Being part of the construction industry can be pretty challenging. Unfortunately, some statistics have shown that approximately one-half of all construction companies are going to be out of business in a couple of years.
At least, that's what Associated General Contractors of America have concluded. What's so complex about this line of work? Equipment issues, economic downturns, material shortages, and many other problems can cause a contractor's firm to experience a downfall.
And after all, no construction project owner wants to rely on a contractor whose responsibility is pretty precarious. But that's why we have surety bonds. They offer financial security on construction projects by assuring project owners that everything is going to end perfectly. But what else needs to be known about them?
The Importance Of Surety Bonds In House Remodeling
Financial Security And Construction Certainty
Even though performance bonds are mandatory by law on public projects, the use of these types of bonds on privately-owned construction projects is something that the owner demanded. In case you didn’t know, other types of financial security, like self-insurance and letters of credit simply do not cover the risks that are part of any construction projects.
That’s precisely one of the reasons why a vast majority of private owners nowadays are interested in performance bonds and will not work with contractors who do not offer them. Namely, with a performance bond, the owner doesn’t have to obsess over any project-related risks.
How come? Well, that's because the risks of construction are being moved from the owner to the surety. If by any chance, the contractor defaults, the surety will most likely have to pay up for a replacement contractor, offer technical aid, or pay the current contractor. Now, if all of this sounds appealing to you then it would be advisable to opt for a surety bond service so you can get a bond quote as soon as possible. In most instances, these quotes are free of charge.
Prequalification Of The Contractor
The surety firm's strict prequalification of the contractor is here to protect the project owner and at the same time provide assurance to the architect, lender, and anybody else who is part of the project.
What's interesting is the fact that surety bond producers and surety businesses have been assessing contractor and subcontractor performance for over a century. Namely, their experience, skills, and objectivity in prequalifying contractors are one of the bond's most precious traits.
Before issuing a bond, the surety firm must be one hundred percent satisfied with these attributes that a particular contractor must have:
Good references and reputation
A plethora of experience
The ability to meet existing and future demands and obligations
The essential equipment that’s necessary to get the job done, or at least the ability to acquire it
A great credit history
An established bank relationship, along with the line of credit
What Else Needs To Be Mentioned?
Let's Discuss The Contractor's Failure
One of the biggest risks of a particular construction project is the potential for contractor failure. Namely, according to the reports (that were published over twenty years ago) by Dun & Bradstreet’s Business Failure Record, over 80,000 construction businesses have experienced a major downfall.
The liabilities of the failed companies surpassed $21 billion. And that's precisely one of the reasons why these days we have performance bonds. They can be defined as secure, trustworthy, and proven protection against these types of events and they normally cost between one and three percent of the contract price.
Keep in mind that on bigger projects, these bonds can even cost less than one percent. Therefore, it’s safe to say that performance bonds are a great investment because they protect an owner from contractor default.
What Are Their Main Duties?
They guarantee that a certain project is going to be finished according to the terms of the contract and at a set contract price
They also guarantee that suppliers, laborers, and subcontractors are going to be paid even if the contractor defaults
Mitigate the shift from construction to permanent financing by getting rid of liens
Lower the possibility of a contractor diverting money from the project
Offer an intermediary – the surety – to whom the owner can air grievances and complaints
Reduce the expense of construction in some instances by facilitating the use of competitive bids
It's easy to see that performance bonds are one of the best ways to protect project owners from irresponsible construction companies. Therefore, if you want to decrease the risks that come with these projects, then you should opt for surety bonds.