The two most commonly encountered construction bonds are performance bonds (also known as contract bonds) and advance payment bonds. Their aim is to guarantee that a contractor will complete a project satisfactorily. The bond safeguards the insured party in the event that the contractor fails to fulfil its contractual commitments. Frequently, the investor or owner will request a construction bond to ensure that the value of the work will not be lost in the event of unforeseen circumstances. In this article, construction claims consultant, we take a look at the process involved and the options available to you.
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When is a construction bond needed?
Bonds for the performance of a construction project are frequently required in bids for commercial and Local Government contracts, as well as being fairly common in property development. The necessity of a performance bond is contingent on the perceived financial strength of the bidder.
Don’t be surprised if you’re asked to provide performance and payment bonds as a guarantee for the completion of a construction project if you submit a bid.
What is the difference between a Conditional bond and an on-demand bond?
If a contractor acquires an “on demand” bond, the employer or client may request payment of this bond at any time, even if the contractor has not breached the contract. Even though the developer genuinely owes the contractor money, there maybe instances where the bond has been invoked.
A ‘conditional’ bond, on the other hand, cannot be used unless the developer or client can demonstrate that the contractor has failed to comply with the terms of the contract and that the beneficiary has suffered a loss.
Where can you get a construction bond?
Generally, bonds are obtained from either a bank, a bondsman or surety, typically through a broker. Generally, banks would issue “on demand” bonds and may bind the bond’s value, limiting the contractor’s financial resources. Often, a bondsman or surety will issue a “conditional” bond and will not tie up the contractor’s funds. Therefore, the majority of contractors view a bank’s bonds to be overly restrictive.
Often, applying for a construction bond is relatively straightforward. If you have all the necessary documentation, the process normally takes between 7 and 14 business days.
What is the difference between a on-demand bond and a guarantee?
On demand bonds impose a primary obligation (as would be the case with an indemnity contract) on the issuer to pay if the employer makes a compliant written demand, without having to commence proceedings against the defaulting contractor or prove a breach of the contract or obligation for which the on demand bond was issued.
In contrast, the obligation to pay under a guarantee is contingent on the employer establishing the contractor’s liability in relation to the underlying contract. It is a secondary responsibility. Regarding any claim under the performance bond or guarantee, the issuer may rely on the contractor’s rights, counterclaims, and defences. In this manner, the issuer’s liability is equivalent to the contractor’s. The default bond or guarantee cannot be evaluated in isolation; it must be evaluated alongside the underlying contract.
Why do claims arise in construction?
There are often complications involved in the construction of any commercial or residential building. It is possible that the size of the project has no bearing on the degree of difficulty, the quantity of additional labour necessary, or whether the construction will take longer and cost more than anticipated.
A contractor may have a claim against the employer for a change or delay. Additionally, the employer may have a claim against the contractor for another delay or defect. In light of this, the employer’s expert consultants and advisors may be required to determine any claims from the employer to the contractor or from the contractor to the employer under the construction contract’s terms. If subcontractors file a claim against the contractor for delays, changes in specifications, or faults, further issues develop.
The role of a construction lawyer
A construction lawyer will be able to advise clients on their rights, entitlements, and responsibilities under the construction contract. This means that they will be able to describe the concepts that will be used to determine if they are entitled and, if so, how much they will receive.
It is crucial that the legal expert you hire has extensive experience representing clients in such matters. Before hiring a construction solicitor, you should inquire about their previous experience. After determining that they are capable of handling your case, you should proceed.
Typically, skill sets are complementary. Therefore, solicitors can sometimes lack the technical expertise required to estimate the value of a claim, evaluate periods of delay, or render an opinion on engineering-related concerns.
The beneficiary of a performance bond should get the bond money promptly upon demand. However, there are risks associated with calling performance bonds, which can result in lengthy, costly, and complicated litigation. Consequently, seeking experienced legal advice is essential to mitigate these risks.
How we can help
We have a proven track-record of dealing with construction disputes. Not only does our construction department have extensive legal experience and knowledge of construction law but we also have the benefit of chartered surveying experts. The nature of bond claims can often involve potentially complex areas of law. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Construction Solicitors
It is important for you to be well informed about the issues and possible implications of making or defending a construction bond claim. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Construction solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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