I'm Looking for Bond, Construction Bond
Posted 10-19-2009 at 01:28 PM by constructonomics
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In the eyes of an owner of a construction project a payment and performance bond is like that warm and fuzzy security blanket that takes all their troubles away. Bonding is one of those construction issues that I never fully understood. And I guess I still don't, but my knowledge probably quadrupled when I actually tried to obtain one for myself.
We've all heard of the requirement for contractors to be bonded and insured and this is especially the case when public entities are using a low bid method of selecting contractors. But really, what are they?
Surety bonds provide financial security and construction assurance by assuring owners that contractors will perform the work and pay subcontractors, laborers, and material suppliers. It's basically a risk transfer mechanism where the surety company assures the project owner that the contractor will perform a contract in accordance with the contract documents. If the contractor defaults or goes bankrupt, the bonding company comes in and finishes the job on their dime.
Bonds are actually a lot older than I thought. I read an article about the first known bond to have been etched in a clay tablet from the Mesopotamian region around 2750 BC. According to the contract, a farmer drafted into the service of the king who was unable to tend his fields. The farmer contracted with another farmer to tend them under the condition they split the proceeds equally. A local merchant served as the surety and guaranteed the second farmer’s compliance - a brave man.
However, even in 2750 BC Mesopotamia, payment and performance bonds were tougher to find than an exploding money clip, and without a code name like 007, it's still tough to get one. I was in hot pursuit (sans Alpha Romeo) of a payment and performance bond this week while putting together a bid for a public repair project. After days of discussions and filling out forms of financials, I was told about two hours before bid time that I would have to put 30% of the contract value up as collateral in order to get a bond. Thanks for the notice.
Just like a municipality doesn't want to take a risk on an unproven contractor, a surety is similarly cautious. This kind of leads me to wonder what good they are anyway; they won't bond you unless the risk of you defaulting is next to zero to begin with. The owner could just as easily write joint checks or contract directly with the sub (who are also bonded by the way) and hire the general contractor as a consulting construction manager.
In private projects however, this is how most work is done. In an effort to avoid doubling up on security (and wasting money), the subs are bonded and the general contract either goes unbonded or acts as a consulting manager. This is the more practical and cost effective way to do it, but when tax payer dollars are on the line, I suppose logic, practicality, and certainly cost effectiveness are all thrown into a BMW Z8 and shredded by a helicopter.
So without a bond my bid was forced to spontaneously self destruct (no, that's Mission Impossible) and I'm back to the drawing, err bidding board, and another trip to the Casino Royale of public works request for proposals.
We've all heard of the requirement for contractors to be bonded and insured and this is especially the case when public entities are using a low bid method of selecting contractors. But really, what are they?
Surety bonds provide financial security and construction assurance by assuring owners that contractors will perform the work and pay subcontractors, laborers, and material suppliers. It's basically a risk transfer mechanism where the surety company assures the project owner that the contractor will perform a contract in accordance with the contract documents. If the contractor defaults or goes bankrupt, the bonding company comes in and finishes the job on their dime.
Bonds are actually a lot older than I thought. I read an article about the first known bond to have been etched in a clay tablet from the Mesopotamian region around 2750 BC. According to the contract, a farmer drafted into the service of the king who was unable to tend his fields. The farmer contracted with another farmer to tend them under the condition they split the proceeds equally. A local merchant served as the surety and guaranteed the second farmer’s compliance - a brave man.
However, even in 2750 BC Mesopotamia, payment and performance bonds were tougher to find than an exploding money clip, and without a code name like 007, it's still tough to get one. I was in hot pursuit (sans Alpha Romeo) of a payment and performance bond this week while putting together a bid for a public repair project. After days of discussions and filling out forms of financials, I was told about two hours before bid time that I would have to put 30% of the contract value up as collateral in order to get a bond. Thanks for the notice.
Just like a municipality doesn't want to take a risk on an unproven contractor, a surety is similarly cautious. This kind of leads me to wonder what good they are anyway; they won't bond you unless the risk of you defaulting is next to zero to begin with. The owner could just as easily write joint checks or contract directly with the sub (who are also bonded by the way) and hire the general contractor as a consulting construction manager.
In private projects however, this is how most work is done. In an effort to avoid doubling up on security (and wasting money), the subs are bonded and the general contract either goes unbonded or acts as a consulting manager. This is the more practical and cost effective way to do it, but when tax payer dollars are on the line, I suppose logic, practicality, and certainly cost effectiveness are all thrown into a BMW Z8 and shredded by a helicopter.
So without a bond my bid was forced to spontaneously self destruct (no, that's Mission Impossible) and I'm back to the drawing, err bidding board, and another trip to the Casino Royale of public works request for proposals.
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Since I was laid off from a commercial steel fabrication and erection contractor in March, I have been writing a construction industry blog and I'm working on the start-up of a construction managment company.
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