Gone are the days when surety bonds were only for government contracts. Nowadays, private project owners are also interested and going for surety bonds for their private construction projects.
If you are investing in a real estate project and a private contractor is handling your project, the risks involved are huge, and it is important to protect your investment in case the contractor is unable to fulfill all the obligations mentioned in the contract. Thus, to avoid the risk of the project being delayed or abandoned, a Performance bond, also known as a surety bond, is made between the parties.
There are many benefits of these bonds for your private projects. The following are a few:
It Is A Type Of Payment Bond
Surety bonds are a payment bond that ensures that you are paid even if the project fails. It guarantees that the subcontractors, vendors, suppliers, and any party investing in the project gets reimbursed, and you are not burdened if the contractor cannot perform the project.
Being a project owner, you have your financial responsibilities and boundaries, primarily when investing in private projects. In private projects, the risks involved are more than in government projects, as no one will save you if the project fails.
A payment bond will be triggered after filing for a mechanic’s lien. And in any event of the lien, the contractor will discharge the surety bond and start paying the parties. The vendors, suppliers and subcontractors can sue the surety for payment directly.
Liability On The Contractor In Regards To The Project
The private real estate business involves too many risks. If you are in contract with a contractor to complete your project, you must know that there is a risk it may get delayed, not completed as agreed upon, or even get abandoned because your contractor went out of business.
Having a surety bond is a way to let the contractor know their obligations and liabilities to you. This fear of liability will ensure your project is completed on time and as per the standards agreed upon. It acts as a legal obligation on the contractor’s part to complete the project and all matters related to it as decided by both parties.
No Additional Burden On The Owner
After paying for all the costs involved in the project, the owner is already risking too much in the form of money. A performance bond will help ensure that no additional charges or costs are incurred by the owner in case of any project mishap.
A privately held real estate, construction, or any other contract project runs on strict deadlines, and any delay in the completion of the project can result in additional costs, and even potentially result in losses to various stakeholders involved in the project. As a project owner, you can rest assured knowing that the surety, or the party issuing the bond, will also recoup the additional costs and losses that had to be incurred due to the failure of the contractor.
Best Alternative To Bank Bonds And Letter Of Credit
Surety bonds are the best alternative to bank bonds and LOC (letter of credit). Most bank bonds have some limitations and procedures that make it a little tricky. However, performance bonds can be issued by any financial institution that can incur risks.
Moreover, LOCs are also not an appropriate option for huge investment projects. Conversely, performance bonds are available exclusively for huge projects. Also, the terms mentioned in the surety bond act benefit all the parties involved and ensure timely payments of all dues.f