The construction sector is a very risky business. Many construction companies are vulnerable to risk factors and problems that can lead to insolvency. This is why surety bonds exist; to protect a contractor’s clients against the financial consequences of contractor default. Surety bonds offer assurance that the contractor will complete the contract on time, within budget and according to the agreed-upon specifications. Without these bonds, the contractor is exposed to potential risks leading to an unfulfilled contract.
Here are a few examples:
- Weather conditions that can cause expensive delays and/or damage to materials
- Lack of material or suppliers
- Incomplete or inaccurate estimates
- Errors in quoting a construction policy, resulting in a bid too low to fulfill the contract
- Poor project management
- Inadequate financing
- Suspended or reduced operating line of credit
- Illness or death of the principal shareholder
- Bad investments in sectors outside construction
- Disputes or lack of cooperation among the parties involved (contractor, architect, client, etc.)
Many of these situations are beyond the contractor's control. Still, any one of these reasons could potentially result in the insolvency of a contract and cause project default. In these cases, the client often suffers financial and scheduling repercussions. Therefore, clients should be aware of the risks and should know how to best protect their own interests..
The best way to do this is to hire only contracting companies that are bonded by an insurance provider. This minimizes the risks of default by having the contractor undergo a qualification process. Surety bonds not only reduce the likelihood of a default, but also give the bond owner a peace of mind by shifting the financial risk to the surety company. However, if a claim is filed, the bond owner often must repay the surety company.
The bonding also assumes the administrative burden of work arrangement and settling overdue accounts to subcontractors and suppliers. This effectively transfers a fair portion of risk to a surety company.
Is your business covered? Call Area Insurance Services at 432-570-4373 for more information on Midland surety bonds.