Primary Practice Contact: David Slaughter
Construction Surety in Utah
Although construction surety bonds are fairly standard in the industry, many people—even those in the industry—do not fully understand this type of insurance. A surety bond is a guarantee that the contractor will perform the stated obligation. The three primary types of construction surety bonds include:
- Bid bonds—a guarantee that the contractor, or “principal” will honor the bid submitted, and, if awarded the contract, the contractor will sign all contract documents. The contractor may be sued under the surety bid bond for refusing to honor his or her bid, and can be liable for additional costs the owner incurs due to re-letting the bid (usually the difference between the low bid and the second low bid).
- Performance bonds—a guarantee that the contractor will complete the contract’s terms, including price and time. Should the contractor default, or be terminated for default by the owner, the surety can be called upon to complete the contract, whether through a completion contractor, selecting a new contractor to work with the owner, or allowing the owner to complete the remaining work with the surety paying the costs.
- Payment bonds—a guarantee that all suppliers and subcontractors will be paid by the contractor. The owner, suppliers and subcontractors can all sue under a payment bond.
Contractors may also have completion bonds, supply contract bonds, construction contract bonds, supply bonds and labor and materials bonds. In a privately funded project, a surety bond can help create a smooth transition from construction financing to permanent financing, ensuring completion of the project. When the contractor is working on a public project, a surety bond supports contractor prequalification, payment protection for subcontractors and suppliers, and protection for the public regarding completion of the contract. Surety bonds are, essentially, a three-party contract, entered into by the contractor, the surety and the owner.
Differences Between Insurance and Surety Bonds
There are significant differences between insurance and surety bonds, including the following:
- Surety bond pre-qualifications are meant to prevent or minimize loss, while insurance spreads losses among a large group of similar risks;
- Surety bonds have three parties, with the surety and the contractor sharing the risk, while insurance has two parties, with risk transfer to the insurer;
- Surety bonds are project-specific, while insurance is term specific;
- Surety bond coverage is 100 percent of the contract price for performance, while insurance coverage is up to the policy limit, less the deductible, and
- For surety bond claims, the surety has the right to the contract balance as well as indemnity from the contractor for any costs associated with claims, while insurance companies have no right to the insured’s assets.
Benefits of Construction Surety Bonds
A surety bond ensures project completion, within the contract terms, and can even assist a contractor when cash flow problems arise. Although rare, when a contractor abandons a job, the surety steps in and ensures the job is completed. Most surety companies are a division or a subdivision of an insurance company, and are regulated, like insurance companies, by state insurance departments.
Overall, construction contractors are more likely to complete bonded projects than non-bonded contracts, plus surety bonds relieve subcontractors from the need to file a mechanic’s lien. Because any contractor—large or small, experienced or just starting out—can experience problems, surety bonds can significantly minimize the risks associated with construction.
Help with Surety Bonds from SCM
In some cases, the contractor or the surety are unfairly sued under a surety bond, or the owner of the project needs help enforcing a surety bond. When disputes arise, our construction attorneys assist in halting unnecessary litigation and project complications before they escalate. Our construction attorneys represent owners, contractors, subcontractors, government agencies, sureties and lenders across a broad range of construction matters.