For construction projects of all sizes, surety bonds are important instruments that help protect property owners and lenders against the risk of non-performance by their contractors. General contractors can also use surety bonds to help avoid delays and defaults when their subcontractors fail to perform. Despite playing a central role in the bid and build processes for real estate developments throughout South Florida, many aspects of surety bonds are commonly misunderstood. Here is an overview of some of the key facts contractors and property owners need to know:
1. There are three primary types of surety bonds.
“Surety bond” is an umbrella term that encompasses several different types of bonds. In the context of construction, there are three primary types of surety bonds:
- Bid Bonds – As their name suggests, bid bonds help protect property owners during the competitive bidding process. If the contractor who is awarded the project either fails to negotiate the contract or provide the required payment and performance bonds, the bid bond provides financial protection against the owner’s ensuing losses.
- Performance Bonds – A performance bond provides assurance that the primary contractor will complete the project on time, according to specification and on budget. If a contractor fails to perform, the property owner can call upon the surety to either provide financial assistance to the contractor or replace the contractor without financial impact to the owner.
- Payment Bonds – Payment bonds provide assurance that general contractors will pay their subcontractors, suppliers and employees. Property owners and lenders will frequently require payment bonds in order to prevent delays, work stoppages, liens and other issues from arising during construction.
2. A surety bond is not a substitute for insurance coverage.
Surety bonds mitigate the risk of contractual non-performance during construction projects. Insurance coverage mitigates the risk of loss from uncontrollable and unforeseen events. Surety bonds and insurance serve different purposes, and one is not a substitute for the other. Likewise, the different types of surety bonds provide protection under different scenarios, and none provide blanket protection for all construction contract-related disputes.
3. Surety bonds may or may not be mandatory.
While it is generally within the parties’ discretion whether to require surety bonds for private construction projects (public-sector projects are a different animal), lending, bidding and construction contracts will frequently require surety bonds. Parties to construction-related agreements should be sure to carefully review the terms and ensure that any bond requirements can be met.
4. Surety bonds do not guarantee litigation-free construction projects.
Finally, while bid, performance and payment bonds are intended to reduce the likelihood of costly disputes, it is not unusual for parties to major construction projects to find themselves in litigation concerning surety bonds. Questions concerning default of performance obligations, timing of payment obligations, sureties’ indemnification obligations and a wide range of other issues can all lead to multi-party construction litigation.
Michael L. Feinstein, P.A. | Fort Lauderdale Trial Litigation Attorney
If you are facing a dispute involving a surety bond and would like to discuss your options with an experienced construction litigation attorney, contact the Fort Lauderdale law offices of Michael L. Feinstein, P.A. To schedule a confidential initial consultation, please call (954) 767-9662 or get in touch online today.