SURETY BONDS

A surety bond is different from a contractor's license bond. A surety bond is a three-party instrument between a surety, the contractor and the project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed.

Construction Projects. Before associations start large, expensive projects (usually reroofing, repiping, and large-scale painting projects), boards sometimes require the general contractor to purchase surety bonds, also known as construction bonds. The bonds are a negotiated part of the contract and are purchased specifically for the job. Contractors usually pass the expense on to the association. If the association borrows money to fund the project, the lender may require the bonds. There are 3 kind of bonds:

Bid Bond. A bid bond guarantees that the bidder will enter into the contract at the bid price and provide the required performance and payment bonds.

Performance Bond. A performance bond, ensures the project is completed in the event the contractor fails to perform. It does not guarantee that the work will be free of defects, only that the work will be completed. Labor and material warranties normally address defect issues.

Payment Bond. Contractors will sometimes collect payment from the association but then fail or refuse to pay their own subcontractors and suppliers, who then file mechanics liens against the association. The payment bond guarantees that these bills are paid. Frequently, the payment bond is included with the performance bond at no additional cost.

Cost. The cost of the bonds reflect the risk assigned to the contractor by the bonding company. If a particular contractor is new to the industry or has a poor track record, the bond will be more expensive or the bonding company may refuse to insure the contractor altogether. The cost for such bonds is normally a percentage of the contract price.

Updated 8/9/2008