Private construction differs from public work in several ways. Public work is generally limited to competitive bid, but private work can be acquired in other ways. Private work contracts and specifications vary widely in form, content, traditions, and standards, while Public work is generally responsive to codes and guidelines. Unlike public work projects, where architects, engineers, and administrators experienced in contract supervision are prevalent, private owners may not be familiar with construction operations and procedures, and architects and engineers may not be involved.
Given the inherent risks of private construction, when a company undertakes a building project, risk managers are expected to analyze all the perils that can result in a loss. Yet too often, no attempt is made to protect against the failure of the contractor to perform. This can be far more costly than all other hazards combined.
Project owners would not think of proceeding without adequate property and liability insurance. It makes sense to also protect themselves from the disaster of a contractor going bankrupt or defaulting on the project by requiring surety bonds.
Lenders also benefit form surety bonds to protect their resources being lent for private construction projects. Surety bonds for private projects have another benefit as well. Reputable contractors regard the bonding process as a legitimate part of their business. Requiring payment and performance bonds discourages unqualified contractors.
Surety bonds provide protection in several ways:
First, for the owner, performance and payment bonds guarantee that the contractor will perform the contract and pay for the labor and material incurred on the job. They also give the owner the additional security of knowing that the contractor has satisfied the surety's comprehensive pre-qualification process.
Second, for the lender, the bonds provide assurance that if the contractor is paid, the project that secures the loan will be built in accordance with the terms of the contract.
Third, for the architect or engineer, the bond provides confidence that in judgment of the surety the contractor is capable of translating the plans into a finished product.
Fourth, for the attorney, the bonds provide the security of knowing that their client will be protected should the contractor fail to perform.
Fifth, for the risk manager, the bonds provide the satisfaction of knowing that the owner is protected against one of the major perils of building - contractor failure.