Construction can be a risky business. Many of the construction firms in business today will be out of business six years from now, according to the Associated General Contractors of America. An economic downturn, labor difficulties, material shortages, equipment problems, and a host of many other problems can cause a contractor's business to fail -- leaving projects at a stand still.
No construction project owner, public or private, can afford to gamble on a contractor whose responsibility is uncertain or who could end up bankrupt halfway through the job. And how can a public agency, which uses the low-bid system in awarding public works, be sure the lowest bidder will be dependable?
The needed assurance is provided by surety bonds. Performance bonds protect taxpayers against financial loss should the contractor default or fail to complete the job according to the contract.
Payment bonds guarantee that the contractor will pay certain bills for the labor, material, and subcontractors associated with the project.