Buying a House? Here’s all you Need to Know about Contract Bonds

Buying or building your own home is a dream for many of us. We spend years fantasizing about the perfect house, so when we finally reach that goal, it can feel like one of life’s great achievements. Getting there can be an interesting journey involving great deals of financial work, savings, and sometimes contract bonds. Contract bonds are often used in construction, and though you may not have heard of them, they may well be involved in building your new home. Let’s take a look at what they are, different types of bonds, and how they come into play in home construction projects.

A Simple Definition

Bonds are a means of financial protection against any negligence or non-performance of a contractor involved in a construction project. They are undertaken by a bondsman who will pay the agreed bond amount to the client in the event of failings on the contractor’s part. The experts at SwiftBonds.com told us that “Despite the bond being in place to protect the client, the initial cost of it is often borne by the contractor,” meaning it is a no-brainer for the client on a construction project to request contract bonds. It offers security.

Conditional vs. On-Demand Bonds

There are two types of bonds typically used in home construction projects. These are ‘conditional’ and ‘on-demand’ bonds. Both ends in payment from the bondsman to the client, but they each have different requirements that lead to payment being made. If the client writes to the bondsman claiming negligence and requesting the payment, they are paid immediately with on-demand bonds. However, with conditional bonds, they must provide proper evidence of non-performance or negligence by the contractor. This is usually considered the more appropriate type of bond as it is easier to police and makes it harder to make fraudulent claims.

Benefits Of Using Contract Bonds

The benefits of using contract bonds lie on both sides of the agreement. It may seem they only protect the client, but both sides actually benefit from them. The client, of course, is covered if the contractor does not fulfill their duties. They will receive agreed sums of money back and be able to continue construction with another contractor. The contractors themselves are also covered, especially in the case of conditional bonds. It means they cannot be sued or liable for non-performance without substantial evidence. Many contractors also state that using contract bonds makes more clients interested in their services.

Performance Bonds

The most common contract bond is called a performance bond. A performance bond is generally used for the things we have already mentioned: ensuring a contractor completes the job well and covering the client’s losses if they do not. These are very commonly included on construction contracts at any scale, whether it’s an individual building a home or a large corporation hiring a construction company for multiple sites. They are usually valued at around 10% of the full contract value. This 10% compensation will help the client find a new contractor to finish the job properly and covers any losses made due to the contractor’s negligence. Most of these bonds will be conditional bonds so that the bondsman will require evidence of non-completion of work.

Advance Payment Bonds

Many contractors require advance payment before starting construction. This could be required to procure materials or hire staff, or a variety of other reasons. These initial advance payments can be daunting to the client, as they may feel they are paying for something that does not yet exist in their eyes. This is where advance payment bonds are useful. These are typically on-demand bonds where the client can request funds back if the work does not start at an appropriately agreed time or if the contractor appears to have taken their money for nothing. The security this gives clients on construction projects is its main benefit.

Defect Liability Bonds

At the other end of the project, you may request a defect liability bond or defects demand guarantee once your home has been built. These bonds usually state that during a set notification period – usually 6 to 24 months – any defects discovered with the construction are the responsibility of the contractor to rectify. If they do not, the bond can be demanded by the client. This means the client will not have to repair any defects out of their pocket.

As you can see, contract bonds are very useful when it comes to guaranteeing the safe completion of any home construction project. They guarantee financial security in light of the contractor’s poor performance, defects in the building, and much more. If you are undertaking your home construction or buying a newly built house, contract bonds are a perfect way to ensure your home will be top quality and built by professionals.