Surety Bond Requirement in Civil Engineering Projects
Fellows, friends and family, Assalamoalikum!
As the name suggests, I am here to shed light on importance of surety bonds and their types. Before further a do, lets first understand what surety bond is? With reference to below graphical representation, surety bond is explained as:
Surety is a guarantee to the Obligee that it’s work will be completed, provided by the Principal.
The story of surety bond and it’s importance dates back to “The Heard Act of 1894” which was the birth of contract surety marketplace. As Civil Engineering projects involve a lot of parties namely client, consultant, general contractor, sub-contractor, suppliers. A scenario to explain the importance of this act could be that, before “The Heard Act of 1894” the sub-contractor and supplier after working with general contractor if not get paid raise a claim against the project which has sever aftermaths on the project i.e. delay in completion, consumption of a lot of cost, bad image of the owner in the market. To mitigate this problem “The Heard Act” was introduced which required a single payment, performance bond i.e. one bond including both payment bond and performance bond.
At this point I deem necessary to explain the types of bond. There are primarily 3 types of surety bonds:
Bid Bonds: Bounds the lowest bidder (Principal) to complete the project with in the price quoted to the client (Obligee) while submission of the bid.
Performance Bond: Bounds the contractor (Principal) to meet the performance requirements of the project.
Payment Bond: Bounds the contractor (Principal) that it will pay it’s laborers, material suppliers, and equipment suppliers etc i.e. Principal will pay its bills.
The issue faced due to a single bond for both payment and performance was that it had involvement of a great deal of effort, trouble and difficulty in procedural requirements. To encounter this issue “The Miller Act” was passed. Following this act principal was required to provide a separate payment and performance bond. The face value of these bonds were the total contract amount.