New York City is always changing and growing. Some buildings are torn down, some are remodeled and some are built new from the ground up. As an NYC construction professional, you understand the demand is there, but that does not mean the process is easy. You must deal with clients, employees, city regulations and possibly subcontractors. Depending on what type of project you are working on, you may be required to sign surety bonds. Here is what you need to know about surety bonds before you get started.
What is a surety bond?
A surety bond is essentially a three-party deal between the surety company, the owner and the contractor. By signing the bond, the surety company is insuring to the owner that the contractor will finish the project as stipulated in the contract.
What types of surety bonds exist?
According to the New York City Surety Association, there are three main types of surety bonds. Some projects may require a bid bond, which ensured you submitted a realistic bid, and you intend to provide any other required surety bonds. A performance bond provides for the owner in case you fall short of the contract, like by going over the bid price or through delays. If you do so, the owner will be compensated. With a payment bond, you are stating that you agree to pay all employees, subcontractors or material suppliers.
Why would a surety company enter into these agreements?
A surety company is somewhat like an insurance company, but the main difference is that surety companies are taking little risk. Before the surety company agrees to sign the bond, they investigate a construction company to make sure you can perform as outlined in the contract.
What does a surety company look for in an investigation of contractors?
Most surety companies and bond producers have been in the business for a long time. They are very experienced at evaluating contractors.
Here is some criteria they may look at when evaluating you:
- Excellent credit history
- Has needed construction equipment to complete the project
- Experience completing similar projects
- Stellar references and a good reputation
- Ability to meet the obligations laid out in the contract
- A good relationship with a bank and a line of credit
What happens if you default on a surety bond?
The owner of the property must formally state you are in default on the surety bond. Then the surety company investigates the claim. This protects you in case the owner has declared default improperly. If the default is genuine, what will happen is typically laid out in the bond. You may be able to re-bid the project to complete it, have to pay a penal amount, need to bring in another contractor or need to aid another contractor for completion. For those struggling with surety law issues, you may consider reaching out to an attorney experienced in representing professionals in the construction industry.