Contractor Bonds

Why Does California and Other State Require Construction Bonds

The title sounds like it deserves a punchline, doesn’t it? On a serious note, why does California and other states require construction bonds? The idea seems a bit extreme. It is almost as if you are expecting someone to mess up in some form or another. (Nice to know there’s trust between client and contractor). Well, get yourself a nice drink of whatever and settle down to learn why this is the case. Sure it may not seem fair to the contractors or the clients to the contractors, but their job is to make the project work. That’s just business.

What is a construction bond?

From my quick check, the construction bond is a guarantee between a group of three parties and states responsibilities of each party should the project go awry. (On a side note, in construction this happens a lot). This is designed to benefit the investors from harmful financial issues.  Here is a brief overview of the different types.

What do they cover?

As they are tailored around the performance of a construction project, this will cover three main points:
• Event that causes a disruption
• Unable to reach specification
• Bankruptcy of builders

Let’s go through each one in a bit more depth.

Event that causes a disruption

This will typically be between the contractors and the client without the input of the investor. (After all, all the investor is interested in is the financial reward). If the client, contractor start to become hostile and unresponsive to each other and this comprises the schedule of the project it’s not the investors fault. So, they shouldn’t be expected to be responsible for this and, as a result, there’s no need for them to pay. Seems reasonable.

Unable to reach specification

Why should the investor pay if the job isn’t right? If it’s not what they asked for, why are you expecting them to pay? That is just illogical. They asked for something, you messed up, you clean up.

Bankruptcy of Builders

From my experience, being bankrupt shows you might not be the most able person financially and therefore the investor shouldn’t be relied up to be bail the contractors out. Consequently, they are protected and hold no legal responsibility if such event should occur during the project.

To wrap It all Up

That is a whistle stop tour about my California and other states have a construction bond. The bottom line is the investors don’t want to clear up the mess of everyone else. In all fairness this seems reasonable and hence by the bond is in place.

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