As we already know, construction is a business with high risk. According to Associated General Contractors of America, nearly 50% of new construction companies will end their business within the first 6 years. There are many factors underlying this phenomenon; lack of construction equipment, lack of building materials, regulatory changes, unexpected incidents, and many others.
Every businessman or owner in the construction sector is very aware of this risk and they do not want to gamble on contractors who may be unprofessional, do not have enough ability, and are certainly vulnerable to changes. They (the owners of the construction project) certainly need a certainty that they will get what is stated in the contract. This certainty is especially desirable for public bodies-public bodies that typically use low-bid systems in awarding contracts.
The surety bond is what the construction owner needs
A surety bond or contractor insurance ensures the security of a construction project, in other words ensures that every contractor involved is able to complete the work in accordance with what has been agreed in the contract. In other words, the surety bond is a guarantee bond that regulates the transfer of risk where there is a third party’s involvement in the problem between the first and the second party. This guarantee is indispensable; not only to ensure contractors complete their work on time and in accordance with expectations, but also to ensure they pay their subcontractors, suppliers, and laborers. All are in one unit and the neglect of only one element alone can undermine the entire process.
In fact, a contractor bond offers three types of guaranteed bonds; supply, performance, and also payment of bonds. The offer ensures that both parties are mutually offering each other with willingness and goodwill and most importantly, both the construction owner and the contractor understand their respective rights and obligations. While the performance bonds provide the maximum possible protection against the possibility of construction owners losers due to the contractor failed in completing the work in accordance with the agreement. The latter is a payment bond that ensures all parties under the contractor receive their rights. The point is that the contractor pays what to pay on subcontractors, material suppliers, as well as workers.
Viewed from a historical perspective
The surety bond has been known for thousands of years. Perhaps the first originator was the ancient Greeks in the era of Herodotus. In 670 BC, contract implementation guarantees were commonly used for major construction projects. Whereas in the United States, the process of marrying a surety bond began in 1893 when the US Government required each contractor to send a guarantee letter ensuring that they would do the work as agreed. This includes paying obligations to workers and suppliers. From the above explanations we can conclude that the concept of construction assurance is not a completely new concept but something that has existed since ancient times.