Although government agencies frequently require the use of contract bonds for construction projects in Georgia and Alabama, local contractors are often left to navigate the bonding process on their own. Getting grasp of how bonds work can help contractors feel better prepared to work with both surety providers and the government agencies that require the bonds.
How contract bonds work:
Contract bonds are separate products from insurance policies and liens
and should never be confused with either. The confusion probably arises because surety bonds, like insurance policies and mechanics liens, may allow harmed parties to collect recompense when contractors abandon their work mid-project or otherwise perform inadequately.
However, whereas insurance policies and mechanics liens are put in place with the assumption that claims are statistically likely at some point, surety providers execute contract bonds with the intention of avoiding claims and deterring unreliable contractors. Contractors who are unable to meet the application prerequisites will not be able to get a bond and thus will be unable to do work. This process helps weed out contractors who put their clients, and the general public, at greater risk.
Contractor License Bonds:
Contractors typically have to secure license bonds
before they get a business license to work within a certain area. Contractor license regulations vary by state, and different government agencies outline the specifications.
A number of different regulations outline rules regarding contractor licenses in Alabama, and they vary based on a contractor’s specialty or specific project. General contractors or subcontractors must must secure a contractor’s license from the state if they will be working on a project where labor and materials will cost $50,000 or more. A more specific example is the state’s Board of Heating & Air Conditioning Contractors, which requires a $15,000 contractor license bond for contractors working on heating, cooling or refrigeration projects. Getting this type of bond
in Georgia typically requires communication with the Georgia Construction Industry Licensing Board, which is made up of five state divisions related to the construction industry. The board requires a $25,000 general contractor licensing bond that must be issued by a surety agency licensed to do business in Georgia.
Bid, performance and payment bonds: Three of the most widely utilized contract bonds are bid bonds, performance bonds and payment bonds. Bid bonds provide a guarantee that a contractor will not increase the initial price bid submitted to a project owner. Performance bonds guarantee that a certain level of quality work will be completed. Payment bonds guarantee that the contractor will pay for all materials and subcontractors used during the project.
Alabama Bid Bonds: Alabama Building Commission form C-4 requires a bid bond’s penal sum to be 5% of the principal’s bid amount without exceeding $10,000.
Alabama Performance Bonds: Alabama Building Commission form C-6 requires a performance bond’s penal sum to remain equal to the contract sum as it is adjusted by any and all contract change orders. This means if a contract is written for a $250,000 project, the performance bond’s penal sum will be $250,000. If additional labor and materials increase the project amount to $300,00, the bond’s amount will increase to $300,000 as well.
Alabama Payment Bonds: Alabama Building Commission form C-7 also requires the bond’s penal sum to remain equal to the contract sum as it is adjusted by any and all contract change orders. In both cases the surety provider must approve the increase.
Georgia Bonds: In Georgia, different government agencies—such as the Department of Transportation, the Department of Revenue or the State Board for Residential and General Contractors—regulate separate aspects of the construction industry. Each agency will have its own individual expectations for the different kinds of contract bonds regarding the terms, penal sums and premiums.
Failure to purchase and maintain the necessary bonds as outlined by industry regulations can result in legal action against noncomplying contractors. The resulting fees and penalties are expensive to pay for, not to mention detrimental to a contractor’s professional reputation and credit score. Before beginning work on a project, contractors should make sure they fulfill all contract bond requirements. Finally, contacting a Georgia construction lawyer
with any legal questions regarding the bond’s terms is always a good idea.
This has been an guest post by an online surety bond producer
that offers over 25,000 bond types to professionals across the nation. The agency has a special interest in helping contractors and their lawyers understand the legalities behind the surety bond process.