Bonds in Missouri Construction Projects Explained
Aug 6 2024 On Behalf of David M. Duree & Associates, P.C. Construction Law
Construction bonds provide a way for property owners, contractors, and suppliers to secure their contractual performance obligations for a given project. An experienced construction law attorney can advise you on whether such a bond is right for your circumstances and, if so, help you secure one in a timely manner.
Understanding Construction Project Bonds
Construction project bonds provide financial security and peace of mind to parties involved in a construction project. Bonds ensure contractors hired to work on the project will perform at the contracted price and have the financial and professional ability to complete the contracted work. At the same time, they also guarantee payment to contractors and suppliers.
Types of Construction Bonds
Common types of bonds used in construction projects in Missouri include:
- Bid bonds: A bid bond serves as a guarantee from a surety company to a construction project owner. The bond certifies that the contractor will fulfill the obligations of the contract and will accept the contracted project as bid. Bid bonds cost a few percentage points of the total contract price. When a contractor fails to perform a project as contracted, the project owner can file a claim against the bid bond, compensating the owner for the difference between the original bid and any higher contract price the project owner pays a replacement contractor.
- Performance bonds: A performance bond guarantees that a contractor will complete a construction project according to the contract terms with the project owner or general contractor. When a surety company issues a performance body, the company effectively certifies that a contractor has the professional and financial capability to complete the contracted project. Performance bonds insure general contractors or project owners against losses caused by a contractor’s inadequate performance, such as the extra cost to rebid the project or costs of remedial work.
- Payment bonds: A construction payment bond guarantees that a contractor or project owner will pay contractors and suppliers the agreed-upon contract price. A project owner or general contractor may obtain a payment bond to ensure payment to contractors on the project, or a supplier may require a payment bond from a contractor before delivering construction materials or other supplies.
Legal Requirements
Many state and federal construction projects require construction bonds for contractors and suppliers involved in a particular project. This prevents companies from accepting contracts and then refusing to do work until the government agrees to a higher contract price. However, in Missouri, government entities and officers cannot require construction project bidders to obtain bonds from a particular insurance or surety company.
Challenges and Considerations
There are certain challenges and considerations that may arise when requiring or securing construction bonds, including the following:
- Ensuring the financial stability of an insurance/surety company: Economic downturns can cause insurance and surety companies to become insolvent and unable to pay out on the construction bonds they’ve issued.
- Calculating financially reasonable bonds: Project owners and general contractors must determine a financially reasonable cost for bid bonds based on the likely additional expense necessary to secure a replacement contractor.
- Imposing bond requirements on smaller contractors: Bond costs can become prohibitively expensive for smaller contractors, effectively excluding them from bidding on potentially lucrative contracts due to the amounts of money involved.
Contact a Construction Law Attorney Today
If you’re sending out an RFP or bidding on a construction project in Missouri, talk to a construction law attorney about the importance and use of project bonds. Contact David M. Duree & Associates, P.C., today for a free, no-obligation consultation with Attorney David M. Duree about your legal options.