9 Essential Bonds and Insurance for Construction Companies
If you are doing work as a contractor, certainly you will be asked to provide some sort of proof of bonding or insurance protecting your customer and your investment. Construction bonds are required on almost every single construction project and in some instances are related to contractual obligations. Understanding construction bonds is an essential area that you must dominate to be able to get the best deals from sureties and insurance companies. Here is a list of the most common construction bonds required as part of all construction contracts
A bid bond is a guarantee that you provide to the project owner stating that you have the capability to take on and implement the project once you are selected during the bidding process. However, because of a bid bond, they will be more comfortable awarding a project to a contractor knowing that if the project fails, they can collect compensation from the surety bond.
A performance bond will protect the owner against possible losses in a case a contractor fails to perform or is unable to deliver the project as per established and the contract provisions. Sometimes the contractor defaults or declares himself in bankruptcy, and then in those situations, the surety is responsible to compensate the owner for the losses.
If a subcontractor, contractor, or any other construction agency related to the project that does not have a direct contractual relationship with the owner, they must provide a Preliminary Notice within the established time limits. In most states, the contractor has to provide this notice at least 20 days in advance of putting on the lien.
The payment bond forms a three-way contract between the Owner, the contractor and the surety, to make sure that all subcontractors, laborers, and material suppliers will be paid leaving the project lien free. A Payment Only Bond is rarely requested and is billed usually at about 50% of the regular premium.
A Subcontractor Default Insurance provides relief for contractors when a subcontractor has its contract terminated by default. This type of insurance provides unique benefits when compared to a traditional default process, that will normally require litigation and delays that will significantly affect contract schedule. A Subcontractor Default Insurance (“SDI”) can be considered as an alternative to surety bonds.
The builder's risk insurance policy will pay for damages up to the coverage limit. The limit must accurately reflect the total completed value of the structure (all materials and labor costs, but not including land value). The construction budget is the best source for determining the appropriate limit of insurance. Builder’s Risk insurance policies can often be written in terms of three-months, six-months, or 12-months.
Property Flood Insurance
Flood insurances are required on high-risk areas as determined by the NFIP and strongly recommended on moderate-to-low risk areas. However, flood insurance is limited on basement and areas below the lowest elevated floor depending on the flood zone and date when it was built. Limited coverage might also be suggested on crawl spaces, enclosed areas beneath elevated buildings and other low-lying areas.
The Miller Act requires that every contractor bidding on a federal project has to post a performance bond and a payment bond covering all labor and material. The law is required on contract exceeding $100,000 working or planning to work on any building or property of the United States. The Federal Acquisition Regulation Current could request additional protection or bonds to contractors being contracted between $25,000 and $100,000.