With millions of dollars at stake in maintenance and construction projects, it’s vital that government purchasing officers understand the importance of surety bonding for these undertakings. Two insurance executives recently made an educational presentation on how this practice provides the risk management these officials need.
The presenters explained how requiring bonded contractors offers critical advantages for public officials. The most significant of these benefits include:
- Prequalified contractors: All bonded applicants undergo careful assessment by surety underwriters, declining contractors that have poor finances or bad work track records.
- Contract completion: Surety bonding allows intervention in the likelihood of a contractor default. If a default occurs, the bonds allow for identifying alternative contractors and may also pay any applicable difference in fees.
- Supplier and labor payments: Sureties mean guaranteed payment to suppliers and laborers if the contractor does not pay for supplies or work performed.
Bonding isn’t just a benefit that offers protection from bidders for federal contracts. It’s also the law. Under the federal Miller Act, all federal contracts that are greater than $150,000 must be bonded, in addition to any other requirements that are held by the state and local governments where the work will be performed. Public officials can also choose to set up bonding requirements of their own for contracts that range from $30,000 to $150,000.
So what kinds of surety bonds are available that are particularly beneficial for government projects? There are four types:
- Performance bonds: A performance bond provides government officials that use the standard contract bid and award procedure with a guarantee if the contractor defaults. In this event, the bond will fulfill the contractor’s obligations as given in the bond. This usually involves completing the contract by finding another contractor and/or paying any contract-stipulated financial penalties.
- Payment for materials and labor bonds: These types of bonds ensure that specific material suppliers and subcontractors will still be paid if the contractor is unable to meet the payment obligations.
- Bid bonds: A bid bond screens unqualified bidders out, as well as provides government entities that used the contract bid and award process with a way to recoup the cost of having to repeat the bidding process, should the winning bidder be unwilling or unable to supply required payment and performance bonds.
- Maintenance and warranty bonds: These bonds guarantee that the contractors shall correct any defects in materials or workmanship within a specific time period after the project’s completion.
Such presentations are part of the ongoing efforts of surety and insurance services, such as NSSI, to educate public and private sector risk management and financial executives on how bonding protects their organization’s best interests.