A surety bond helps to guarantee that a contractor will perform construction projects according to the terms of their contract, on time and at the agreed-upon price. They allow for competitive bidding, which ensures that options are available for those needing a contractor’s services. The fact is that not every contractor is qualified to perform every job that becomes available. Surety bonds are provided to those who are able to demonstrate to the surety company’s satisfaction that they’re qualified to do the work.
Surety assigned risk plans or JUAs would eliminate the important prequalification protection surety bond companies provide the public and the government. The loss of this protection might even harm the open competitive bidding system.
Examining the bonding process
It’s important to understand some basic surety concepts. The following example of a public construction project shows how a bond is supposed to work. Let’s say that a school district in New Jersey decides to build a new elementary school. The district invites contractors to submit sealed bids for the construction project. After looking over the bids, the lowest bidder is awarded the contract. The contractor then provides performance and payment bonds.
These bonds are issued in order to protect the school district if the contractor is unable, for whatever reason, to finish building the school. Because the job was awarded to a bonded, prequalified contractor, the school district benefits by knowing that the surety bond company trusts and believes that the contractor is qualified to get the job done. If the contractor experiences issues finishing the project the district will still get its school built on time, and at the agreed upon price, because the surety bond company will provide the necessary funds to see that the project is completed under the terms of the contract.
If an unqualified contractor who automatically received bonds through a surety assigned risk plan or JUA were building the school, that contractor might be financially unable to deal with any unexpected events that could occur during the construction process, such as a strike, or an economic recession. What if he or she were to encounter material shortages, or equipment problems, or perhaps even extreme bad weather conditions?
Should the contractor fail to perform, the claim would still be paid. But the contractor’s problems may have already caused irreparable delays and significant inconvenience to the client. This is why having surety bonds will help to provide the means and the assurance that the task at hand will be completed on time.