Monday, July 26, 2010

Surety Bonds Protect Your Construction Investments

From time to time, the Texas Construction Law Blog would like to feature guest bloggers who offer different perspectives on issues affecting the construction instrustry. The following article is the first of two about the legal protection and financial security surety bonds offer those involved in Texas construction projects. The guest author is Danielle Rodabaugh, a principal for Surety

Unfortunately, the economic downturn has had many detrimental effects on the construction industry. The resulting financial instability of many professionals, companies, and banks have made payment issues increasingly probable when working with projects of all sizes. It is not surprising for individuals to go unpaid when little or no legal protection was established prior to beginning the project. Whether you're the proprietor, banker, or contractor, you want to make sure:

* the project has a solid financial foundation before work begins
* legal protection is in place to guarantee that your work will be compensated later on

Surety bonds provide this legal protection and financial guarantee.

Functionality of Texas Surety Bonds
Many people–even those who are required to be bonded by law–aren't sure exactly how surety bonds work. Essentially, a surety bond is a legal agreement between three parties to help ensure the fulfillment of a contract:

1. The principal performs a service and secures a bond to guarantee his work according to the contract.
2. The obligee receives the work performed by the principal and is protected by the bond's financial guarantee.
3. The surety issues the bond as a neutral third party to ensure that all work done by the principal is completed according to the contract. The surety is also responsible for overseeing obligations on the part of both the principal and the obligee.

Since bonds are legally binding documents, they encourage the principal to fulfill the contract's terms or else face financial retribution. If the principal fails to meet the bond's conditions, such as making necessary payments, the obligee can make a claim on the bond. This means that bond money can be made available to the wronged obligee. A bond's obligee will vary due to a number of factors, such as the specific bond type or the legal language used in the bond's wording.

Financial Accountability
Depending on the bond type and its specific language, the surety bond company can be held fully accountable for the principal's faults, i.e. the surety could be left paying the bills. This encourages surety bond specialists to take great care in completing a thorough financial review of a principal before issuing the bond. If the contractor or construction company is unable to secure a bond then the entity might not be contracted to do the work, as its performance might be viewed as worrisome. This part of the process helps weed out contractors and construction companies that may be financially unstable due to past problems.

Legal Regulations Regarding Bonding
Various state-mandated regulations require different kinds of bond protection depending on the specific project and those involved. In construction, the Miller Act states that contract surety bonds are to be utilized for all federal projects involving the construction, alteration, or repair of any building or public work project in an amount exceeding $100,000. This law also requires a contractor working on such a project to post two bonds: a performance bond and a labor and material payment bond. Consequently, surety bond agencies issue a number of different construction bonds for large projects that involve in-depth, provisional contracts.

Unfortunately, the Miller Act can only be enforced on federally-funded construction projects that cost more than $100,000. This means that a great deal of construction contracts are still written without ever giving a thought to bonding those involved. Those working with smaller construction contracts are oftentimes at risk, as such contracts may be agreed to by "word of mouth" rather than being officially recorded, leaving loopholes so that legal accountability cannot be determined at a later date. Even though bonding might not be required by law for all projects, it's important for people to realize that they can still choose to protect their assets with a surety bond in these instances.

Although getting a surety bond in Texas might seem complicated or confusing at first, a little research can go a long way in guaranteeing the validity of your work or investments. For a more detailed look at how surety bonds can help resolve payment issues in the construction industry, check back when the second half of the discussion will be posted.