Guide to Understanding Bond Management

All construction and development projects come with the same thing — risk. There’s the risk of work not being completed as contracted, the risk of contractors failing to pay their laborers and material suppliers, the risk of quality work later being found to be defective and the risk of a contractor going bankrupt before a project finishes.

To help protect themselves against the unknown dangers of construction and development projects, project owners rely on construction bonds. These important financial instruments are what ensure projects get completed, even when one of these unforeseen risks becomes a reality. Here’s our guide to understanding bond management to make it easier to digest.

Construction Bonds

Investors use surety bonds in construction projects to mitigate risk. Bonds serve as a form of insurance for project owners and developers in the event a contractor or builder fails to meet project requirements or performance targets. Construction bonds safeguard project owners against financial losses that affect project continuity and completion.

When a contractor defaults and a claim is made against a bond, the surety has several options to make the project owner whole again:

1. The surety or bond issuer can hire a new contractor to take over and complete all contractual obligations.
2. The surety can provide a new contractor and pay to cover any financial losses due to the delay.
3. The surety can provide funding to the original contractor allowing them to finish the work as agreed upon.
4. The surety will provide financial restitution to the project owner for service disruption and financial losses.

Construction Bonds: How They Work

Also known as contract bonds, construction bonds are needed for a construction project in case of disruptions or financial losses. Since the Miller Act of 1994, all government contracts greater than $100,000 require contractors to have payment and performance surety bonds as proof of qualification. A contractor vying for a federal or state-funded construction project must prove the possession of a construction bond or bond surety to bid on a project. This bond guarantees that the project will not stall in case of financial losses or damages.

The goal of construction bonds is to guarantee project owners of project continuity and completion processes. The bond is insurance against financial losses or physical damages that may interfere with project completion. So, bonds protect against project incompletion and delays. In addition, bonds protect against the non-payment of labor and materials from sub-contractors.

Parties Tied to a Bond

Three Parties are Involved in a Bond:

• Project owners or investors. The project owner (obligee) is the client or the person to whom the project belongs. Most project owners include governments, commercial contractors, businesses, and organizations.
• Party constructing the project. The party building the project refers to the contractor or building consultancy contracted to finish a construction project.
• Surety company. The financial institution or surety company backing the bond is the final party in a construction bond. The surety company provides funds or other forms of insurance to projects.

Construction bonds make sure that everything goes according to plan. It guarantees project inception and project completion, thus preventing losses, disgruntlement, and conflict between contracting parties.

Construction Bonding Process

The Process for Securing a Construction Bond is as follows:

• Examine project requirements to know whether a bond is needed or not. If so, determine the type of bond required.
• Obtain bid bonds from surety companies.
• Request or apply for a performance bond if the contract is awarded.
• Complete the project.
• Request for a maintenance bond to complete repairs if required.

Bond Release Management

Once a project is finished and the contractor has successfully completed all of their contractual obligations comes the next phase of the construction bonding process, bond release. This process facilitates the return of any collateral pledged to obtain the bond and releases the bondholder from incurring additional premium payments.

While the bond release process is unique to each project and jurisdiction, the process follows these steps:

1. Confirm all active bonds for the project.
2. Meet with representatives from jurisdiction and surety to discuss requirements.
3. Coordinate jurisdictional inspection process and develop the punch-out report.
4. Develop a critical path task list to expedite the release.
5. Collect, organize, and submit all required documentation to jurisdiction and surety.
6. Work with a contractor to execute onsite punch work.
7. Coordinate all final inspections, sign-offs, and public notices.
8. Process all permit close-outs.
9. Facilitate the release of bonds to the bondholder.

DFM Development Services, LLC – Bond Management Experts

DFM Development Services, LLC provides a full range of bond release services, including handling bond applications, bond extensions, bond reductions, bond tracking, and overall bond management. We have an understanding of bond management and it’s complexities, especially when working with jurisdictional authorities in Maryland, Virginia, and Washington, D.C. DFM offers contractors, developers, home builders, and investors superior bond management solutions for all construction projects.