The larger a construction project the higher the risk. This risk goes beyond the final project goal of renting or selling, but to the timely, cost-effective, and compliant completion of the project. To help minimize risks associated with largescale, six-figure and multimillion dollar construction projects, many investors require contractors to secure bid and performance bonds. That requirement helps to weed out contractors who simply don’t have the budget, manpower, or true capabilities to complete the project as planned.
What is a Bid Bond?
A Bid Bond is a bond secured for any bid-based selection process. The bidder secures the bond and debt as a guarantee to their potential client that they have the financial means to get the job done.
What is a Performance Bond?
A Performance Bond is provided by a bank or insurance company as a guarantee against a contractor’s failure to meet their contractual obligations. Performance bonds are sometimes referred to as contract bonds.
How Bid Bonds and Performance Bonds Work
The upfront expenses of any large construction project are steep for both the investor and the contractor. By requiring all who bid and all who are hired to secure the appropriate bonds, investors have assurance that the contractor can meet their financial obligation. In most cases, bid and performance bonds can only be secured for projects $100,000 or more.
Benefits of Construction Bonds
There are many contractual and legal obligations required for every type of building project; industry compliance for schools, healthcare facilities, residential real estate, and other multi-tenant buildings. It is unlikely that investors will be onsite each day to supervise work, so they need assurance that the contractors they hire have the skill, finances, and attention to detail to ensure the job is completed within contract and compliance.
A bid bonds ensures that every contractor who places a bid has the current, and ongoing cash flow required to complete the project. Once a bid is accepted it is then replaced by a performance bond. The performance bond ensures that the project will be completed to specs, and if for any reason does not meet the contractual obligations—will minimize or mitigate any financial loss.
No 100% Guarantees
Even with bid and performance bonds in place, there is never a 100% guarantee that there won’t be contractual roadblocks. However, contractors and construction companies who comprehend and acquire bonds clearly understand the importance of the obligation they are making. If they fall short of their obligations, they may not be eligible for future bid or performance bonds, and the likelihood of winning future contracts will be greatly diminished.
Whether you are a solo investor or part of a large investment group, if your construction or remodeling project is in excess of $100,000—be sure to secure both bid and performance bonds.