ANSWERS: 1
  • When an individual or company signs a contract with a contractor for a construction project, there is always a risk that the contractor will take any deposits made and not finish the promised work completely or correctly. Contractor bonds mitigate this risk, and are sometimes referred to as construction bonds.

    Identification

    A contractor surety bond is a type of financial credit agreement that guarantees payment to a person or business if the contractor does not perform specific services as agreed.

    Types

    Bid bonds guarantee that if a contractor is awarded a project, he will take the job and sign the contracts as outlined in the bid. A performance bond ensures that the contractor will perform her work correctly, within budget and on time.

    Process

    Before entering a bid or signing a contract, contractors apply for a bond from a surety company, and the surety company investigates the contractor's credit history and credit score to determine whether to approve the application.

    Effects

    If a contractor violates the terms outlined in the bond, the surety company pays the amount of the bond to the contractor's client, at which point the contractor owes the amount of the bond to the surety company.

    Cost

    To obtain a surety bond, contractors typically pay 1 percent to 3 percent of the face value of the bond, JW Surety Bond Consultants reports. The amount of the bond varies and is typically set by the contractor's customer.

    Payment Bonds

    A third type of construction bond, the payment bond, is similar to other contractor bonds in the purchasing method and enforcement process; however, with the payment bond, the customer purchases the bond as a guarantee that the contractor will receive pay for the work performed as outlined in the contract.

    Source:

    Attny.com: Construction Surety Bonds

    JW Surety Bonds: FAQs

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