Construction Curiosities #19 – Do you know Bonds? Construction Bonds

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This weekly Newsletter explores my Curiosities about the Construction Industry. It’s meant to make you think, smile, and become a better, more well-informed Construction Professional.

Summary

This week we will look at:

One Musing: Bonds. Construction Bonds.
One Podcast: Surety Bonds & Minimizing Risk
One Article: Uncommon Construction
One Quote: Much Bigger Than Ourselves
One Meme: Halloween Safety

One Musing

What are Construction Bonds? No, not the kind that you vote on to build a new school. I’m talking about the kind that contractors have to supply to the Project Owner as a form of insurance. While anything insurance-related can make your eyeballs roll to the back of your head, they are quite an important aspect of both Public and Private construction projects.

So here is the High Level – High Speed Construction Yeti version of Construction Bonds. Try to keep up.

What is a Bond?

Simply, a construction bond is a written 3-party agreement where a surety guarantees the principal will fulfill its obligations to an obligee.

Got it? No?

This might help:

The surety is the agency that’s providing the guarantee that the obligation will take place. Think of a Bail Bond. They are ensuring you will show back up to court at the assigned time.

The principal is the General Contractor/ Construction Manager when it’s a guarantee to a project owner. Or it’s a subcontractor when the guarantee is to the GC/ CM.

The Obligee is the one who receives the benefit of the bond. It’s the Project Owner when is from a GC. It’s the GC when it is from a subcontractor.

Types of Bonds

Bid Bonds are provided with the bid. (surprise!) They guarantee the contractor will sign a contract for the bid amount and that they will provide the required P&P bonds.

Performance Bonds are one-half of the P&P bonds you hear about. This bond will ensure the contractor will perform all of the work of the contract.

Payment Bonds are the other half of P&P bonds. This bond ensures that the subcontractors and material suppliers will get paid if the contractor fails to pay them.

For Public Work (government work) there are no lien rights so the Payment Bond is the only remedy for a sub or supplier to get paid. For Private Work, a Payment Bond can help protect the project from Liens as there is another means to get due payment.

How much do they cost?

There is no cost for bid bonds and P&P bond rates vary by company. As with any sort of “insurance” they are calculated based on the risk associated. The more risk the higher cost. They are calculated by taking into account the company’s financial status, work history, and type of work being performed. A startup contractor could have a bond rate of 2.5-3% of the project cost, whereas an established and “trusted” contractor could have a rate of less than 1%.

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Obviously, this was a very quick explanation of what a construction bond is and there are WAY more details and things that we could discuss. For those that don’t deal with bonds all the time, I hope this was either a good refresher or gave a little insight into that aspect of construction compliance.

Let me know your thoughts!

One Podcast

The Construction Leaders Podcast by CMAA has been pumping out some great content. It just so happens that this week when I was already planning to talk about Bonds, they released a great episode about Surety Bonds. Great Minds, I suppose!

They give a much deeper dive into the history, mechanics of them, and also go into a discussion of the difference between Surety Bonds and Insurance Policies.

If you are a Startup Contractor, they also give options on how you can get surety credit when you may not have the years of experience that could be a barrier.

Check out this week’s timely episode about Surety Bonds here: Talking Surety Bonds and Minimizing Risks

One Article

Local non-profit to introduce young people to construction industry, tackles affordable housing crisis

The mission is simple: build houses, frame character. That’s the goal of Uncommon Construction, an idea created in the mind of Aaron Frumin.

“What we lack, in some ways, in our schools and in other areas of our community are opportunities for young people to demonstrate their character in really meaningful ways to develop it,” Frumin said.

His uncommon approach has been introducing local youth to the construction industry. Once accepted to the program, students had the opportunity to get school credit, scholarships, hourly pay, and mentors. The program has a long history of molding homegrown entrepreneurs.

One Quote

One Meme

Remember Safety First, this Halloween! Lift the body with your legs, don’t hurt your back!

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