The Importance Of Surety Bond Insurance In The Construction Industry
Posted on: 25 January 2022
The construction industry is booming owing to a growing demand for houses, offices, and other commercial spaces. Some construction projects are vast and, therefore, quite expensive. As the demand for new buildings rises, contractors often take out loans or surety bonds to finance their projects. Thus, it is common to find projects financed using surety bonds. Surety bond insurance involves the issuance of a surety by a bank or insurance company, guaranteeing the completion of a certain project. Unlike traditional contracts, surety bonds involve three parties where one party (surety) backs the contractor to undertake and complete a client's project. This financing model has enabled many project owners to take high-risk gambles in constructing expensive projects. The following part outlines the significance of surety bond insurance policies in the construction industry:
They Provide Financial Security
The success of a construction project is often hinged on the availability of funds. While there are many sources of funds like banks, surety bonds give the contractor significant financial muscle. Expensive government projects like roads and dams can cost a lot of money, hindering their completion. Surety bond insurance allows the government to award tenders to the winning bidders without worrying they will run out of money. Many contractors are uncertain whether or not they will complete the project, which is not good for business. Thus, purchasing a surety bond offers a safety net against financial loss.
They Guarantee Completion of Various Projects
Many project owners don't get into contracts worth a lot of money because they fear the contractor may not complete their works in time. Issues like bankruptcy, material shortages, and equipment problems can cause the project to stall. These problems can reduce the pace of the construction industry leading to housing shortages. Surety bond insurance can ensure the contractor completes the project as stipulated in the contract. If the contractor fails to complete their duties or comply with specific laws, they are obliged to pay the agreed sum.
They Don't Require Security
Traditional banks require security before giving their clients loans. This security often comes in the form of company assets, cash, or any other collateral to protect the lender from non-performance. On the other hand, surety bond insurance is an effective way of financing contractual security without obligations. It allows access to adequate funds to complete a project, reducing the chances of stalled projects or breached contracts. Thus, surety bonds are a cheap alternative to getting funds without giving up control over company assets.
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