Business

Why Are Surety Bonds Important In The Construction Industry?

Entrepreneurs who undertake construction projects for the government need to know how to estimate and handle the risks of their ventures. In addition to this, it is important for them to determine whether they will be able to complete these assignments on time, within the budgetary limits and as per the specifications of their contracts. They also need to ensure that the subcontractors they engage for these schemes are fulfilling their responsibilities and obligations. On way of accomplishing this task is with the help of surety bonds. These are agreements in writing that protect such businesspersons from financial loss in the unfortunate event of the failure of such construction projects.

How does it work?

When an entrepreneur consents to embark upon a construction projects for the government, he/she needs to enter into an agreement with a reliable surety company in order to enter into a contract. This enables them to receive a bond from this financially sound corporate enterprise, which has a license to carry out a surety. Surety bonds offer protection to such businesspersons against subcontractors who do not have the necessary skills, knowledge and experience to carry out their construction assignments. At the same time, such written agreements also allow them to use the resources of the surety company to complete their projects. Before a businessperson can get such a bond, he/she needs to go through a prequalification process that determines whether he/she has the ability to undertake the project.

Prequalification Process

Companies that provide surety bonds to entrepreneurs spend a lot of time and money in ensuring that such individuals are capable for performing their construction assignments. This is the reason why the personnel of such corporate enterprises have stringent prequalification process for them, which they refer to as underwriting. These officials will only issue such bonds to the businesspersons who apply for them when they fulfill all the requirements of this process. The process helps to keep defaults on the part of such contractors to a minimum. Moreover, as these corporate enterprises promise to offer their own assets and resources to such businesspersons under the agreement, the official of these companies need to conduct a careful review.

Before issuing surety bonds, such companies need to determine whether the entrepreneurs undertaking the construction projects for the government as contractors can fulfill the following criteria:

  • These businessperson have the necessary skills and experience to undertake such construction assignments;
  • They can get the necessary equipment and labor to carry out the projects;
  • These individual have a good credit history; and
  • They have an excellent working relationship with their banker and can obtain a line of credit.

This implies that the surety company has the confidence that the entrepreneurs, to whom they offer such bonds, can operate profitable enterprise and fulfill their obligations on time. The services that such corporate enterprises offer such business persons provides them with financial security they need to complete their construction assignments for the government.

Surety bonds play a vital role in ensuring the success of the construction industry and sustaining its position as one of the fundamental contributors to the economic growth of a country.