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The most important step for your private construction project

There are plenty of opportunities for things to go wrong in a construction project. Some of these are out of your control no matter how much preparation you do beforehand, and they take some flexibility to work around. Others, however, you can prevent with smart business moves. The most important one for significantly reducing risk is using a surety bond, particularly a performance bond. Once you understand why, you will not begin your project without it.

What is a surety bond?

A surety bond, also known as suretyship, protects one party by guaranteeing that another party will complete the promised work. These are the parties involved:

  • Obligee: This is the owner of the project.
  • Principal: This refers to the contractor you have hired to do the work.
  • Surety: This is the institution, usually belonging to an insurance company, that guarantees the principal's performance and pays for financial loss if the principal does not keep the contract.

Suretyship differs from other types of risk management in that it involves three parties, offers higher protection, ensures a competent contractor and has a low expectation of loss. In construction, there are four kinds of bonds: contractor license, bid, performance and payment (to subcontractors and laborers).

Why is a surety bond necessary?

You are not legally required to have a surety bond for your private project, like you would be if you were handling a federal public work. However, it is wise to follow this standard for the best outcome. Surety companies do not want to have to pay money to you, so they only prequalify contractors who meet high expectations. A contractor must have a proven track record in all areas, from reputation to financial history to capability. Surety companies will only accept contractors who pose very little risk of bailing on their obligations.

This is good news for you because the construction industry is infamous for contractor problems. A surety bond means it is very unlikely you will have a bad experience, and in the event that you do, you will not have to worry about suffering a financial hit.

What if the suretyship fails?

There is always a small risk that the contractor will not fulfill the contract and the surety company will evade liability. In this case, you will need legal representation by an experienced Miami construction litigation lawyer who may help protect your rights under the surety bond. Although this scenario is possible, suretyship is still the safest route to take.

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