The construction industry is the backbone of the Canadian economy as research suggests that it employs around 1.4 million individuals and produces $141 billion accounting for 7.5% of GDP. But as frauds in this industry can have disastrous implications for the project owner and the contractors, bid bonds are required. It is a construction bond that safeguards the interest of both developer and the construction owner in the construction project. It is an essential part of any construction process and needs to be understood clearly by both parties involved.
What are Bid Bonds?
This bond can be prepared in written form by a 3rd party guarantor to be submitted to the developer and the project owner. The contract specifies that the developer has the funds needed to carry out and complete the project. It also guarantees payment to the contractor once the work is done. To obtain their bids, contractors or subcontractors must present this agreement as a cash deposit for the client’s financial and legal security.
Which parties are involved?
- The principle:- They are the contractor who purchased the bond. The bond’s terms and conditions will determine the contractor’s liability if they fail to perform the duty.
- The obligee:- Is the project owner looking to hire a contractor to complete the construction project? This person sets the conditions of the bond and can file a claim if the contractor cannot complete the project or violates any contract term.
- Surety company:- The financial standing of the major builder will be assessed by surety firms, and they will assess a premium based on how likely an unfavorable incident might occur.
Why are Bid Bonds required?
Such an agreement ensures the whole process is done fairly and that neither party gets cheated financially or legally.
1. Grow your Clientele
Because many discerning clients and project owners would only agree to accept the bid from the licensed, bonded, and insured contractors, having the necessary license and bonds will help you grow your clientele and your company.
2. Surety for Suppliers and contractors
If something goes wrong with the projects they are working on, suppliers and subcontractors might have to bear the loss of not getting paid for their job. Such bonds can help them file claims if they are not being paid on time after the work is done.
3. Guarantee for the project owner
Such agreements guarantee the project owner that the contractor will complete the work within the stipulated budget. It also guarantees the project owner that they do not have to worry about the payment to suppliers as the contractor will make the payment.
4. Benefits Government
These bonds ensure that the construction companies will not breach the laws and regulations of the construction industry. Even if a contractor considers adopting unlawful practices, such as bonds and license revocation, weed out these actors.
Conclusion
The construction industry has grown rapidly in recent years. This expansion has brought many opportunities, as well as many challenges to deal with. One of the main challenges faced is to minimize fraud. Fraud can happen with any party in the construction project; hence their interest needs to be safeguarded. In such a scenario, bid bonds are used as a guarantee for the project owner that the contractor will complete the project. It also guarantees the contractor that the payment will be made for their job. Hence, such agreements are crucial for every player involved in the construction project, such as the project owner, suppliers, contracts, and the government.
