Bonds do more than get you out of jail
We have had quite a roller coaster year and many industries have been affected by our economy. I am sure many of you will agree that the construction industry has been hit pretty hard. Some of the changes in that industry that I am seeing are an increase in the use of bonds.
Many of us think of bonds as a way to balance out our investment portfolios. Stock values go down – bond values go up. Some may have had to post bonds to get out of jail.
However, in the insurance arena, bonds can be used to ensure that construction projects are completed on time and that the contractor pays all of the suppliers and workers involved in the project.
These types of bonds are called surety bonds. There are three main types of surety bonds for contractors:
- Bid Bonds – these essentially say that the contractor will perform the work at the agreed price in the contract and will provide the additional performance and payment bonds. (These bonds are commonly seen in the public sector)
- Performance Bonds – protects the owner from financial loss in case the contractor fails to complete the project.
- Payment Bonds – assures that the contractor will pay all subcontractors and suppliers related to the job.
Now, you might be thinking everyone should use these bonds and in some cases they should.
However, qualifying for these bonds is not always easy and a smaller contractor can lose out on a job because of it.
Bonds have a broad spectrum of coverage. As we discussed, in the construction industry they are mainly used to protect against a contractor that does not fulfill their contractual obligation and/or goes bankrupt before a project is completed.
In other industries they can assure compliance with state regulations, protect against fraudulent acts and employee dishonesty.
On a positive note, they provide credibility for a business owner. The important thing to remember is to measure the risk with the need of the bond. So when you are asked to provide a bond, make sure you consult with your insurance agent for more information.