Not every construction project requires a bond, but there are several key situations where they are typically mandated. These bonds provide financial protection to all parties involved, ensuring that the project progresses smoothly and that obligations are met. Below are some of the common scenarios where construction bonds are required:
Public Projects
Government construction projects almost always require bonds. This is because taxpayer money is involved, and bonds provide assurance that the project will be completed on time and to the required standards. Public projects carry a higher level of scrutiny and risk, which makes it essential for the government to protect its investment. This is a significant distinction between how public and private clients approach risk management.
Federal Requirements
Under the MillerAct, performance and payment bonds are required for federal construction projects exceeding $150,000 in value. This ensures that contractors fulfill their obligations and that subcontractors, laborers, and suppliers receive payment. Similar regulations, known as ‘Little Miller Acts,’ exist at the state and local levels, with varying thresholds but operating under the same principles. View Michigan’s Little Miller Act here.
Private Projects
Although bonds are not always legally required for private projects, many private owners demand them, particularly for large or high-risk projects. This is especially true when working with new contractors or when the project involves substantial financial risk. In these cases, the more public funds or higher financial risk involved, the more likely it is that a bond will be required. Bonds can offer additional security for private owners, ensuring that the project is completed and any financial disputes are resolved efficiently.
Specialized Projects
Certain types of specialized construction projects, such as those involving environmental concerns, historic preservation, or complex architectural work, may also require bonds. These bonds are established to ensure compliance with specific legal, regulatory, or environmental standards throughout the project.
A Sample Application: How Bonds Protect Projects
To understand the importance of construction bonds, consider a real-world scenario:
During a public elementary school construction project, the general contractor and an excavator got into a dispute over $200,000 worth of site work. The excavator threatened to place a mechanic’s lien on the project, which would have halted progress immediately, causing delays and potentially jeopardizing the project’s completion.
To resolve the situation, the general contractor obtained a paymentbond specifically for the disputed amount. This allowed the legal dispute between the contractor and the excavator to continue without interrupting the ongoing work on the project.
This solution had several key benefits:
- Protects the owner from delays: The project could continue while the dispute was handled separately.
- Keeps the schedule intact: The school project moved forward without any schedule disruptions, ensuring timely completion.
- Provides a clear pathway to resolve the dispute: The payment bond created a formal framework for resolving the financial dispute outside the construction process.
This scenario demonstrates how construction bonds can be powerful tools for protecting projects from delays and unforeseen issues. Bonds not only offer financial security but also ensure that projects stay on track, even when unexpected challenges arise. They provide a safety net that ensures projects are completed as planned, regardless of potential conflicts or financial disputes.
Construction Bonding Specialists, LLC partners with both new and experienced contractors to provide the best bond solutions tailored to their needs. Contact us to learn more.
At Construction Bonding Specialists, we work with new and experienced contractors to find the most satisfactory bond solutions. As a dedicated surety-bond-only agency with decades of bonding experience, we strive to discover surety solutions for all types of cases, ranging from routine to challenging. Contact us online or call us at 248-349-6227 to learn more.
Written by the Digital Marketing Team at Creative Programs & Systems: https://www.cpsmi.com/.