Do I Need A Completion Bond?

Posted: March 05, 2019

The short answer is maybe—if you are undertaking a project that involves borrowing a large sum of money from one or more lenders. In fact, you may need more than one. Learn more about completion bonds below, and request a quote from Contractor Surety Group today.

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What Are Completion Bonds?

Completion bonds, also known as completion guarantees, ensure the full completion of a project even if the contractor runs out of funds. These bonds are often used for projects involving very large amounts of money and/or multiple sources of funds that can take many months or years to be completed and begin generating income to repay investors. Completion bonds are commonly required in the construction industries to provide financial protection for the creditors financing a project.

The bond serves as a guarantee that creditors are paid. It also ensures that there are no outstanding liens once a project is completed. For instance, the bond may ensure that tare are no outstanding lines for parties like suppliers or subcontractors, who have not been paid for their contributions.

Don’t confuse completion bonds with performance bonds. The latter is commonly used in the construction industry to protect project owners from the financial consequences of a contractor’s breach of contract.

Do You Needs It?

In many cases, a creditor putting up money for a project will require the contractor to post a completion bond to guarantee the payment of principal and interest, even if the project is never finished. Typically, creditors whose funds are secured by these bonds require no loan payments until the project has been completed.

The creditor is the obligee in the surety bond contract. A single project with multiple creditors may involve a number of completion bonds.

How Does It Work?

In addition to the obligee, there are two other parties to the bond contract: the principal (the party promising to complete the project) and the surety (the company underwriting and issuing the completion bond). If the project is not completed on time, within budget, and with no liens against it, the obligee has the right to file a claim against the bond. The surety will determine a claim’s validity before paying it and will subsequently seek reimbursement from the principal.

How Much Does It Cost?

The cost of a completion surety bond depends largely on the size of the creditor’s investment in the project, which is the major factor in establishing the required bond amount. The premium rate you will pay is usually in the range of 1-3% for those with good credit. Those with poor credit may pay more. This rate can vary depending on your credit and the surety’s assessment of your ability to complete the project and to cover the required bond amount in the event of a claim against the bond.

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Because of the risk involved, completion bonds go through very careful underwriting that typically involve a good deal of personal and business documentation. At Contractor Surety Group, our construction surety experts are ready to assist you with the process.

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