Good designs, the use of high-quality materials, and excellent construction practices are essential for a project’s success. However, despite these factors, mistakes and disagreements can occur during construction, potentially leading to damages, disputes, and substantial financial losses.
Project construction is a complex and costly endeavor that demands careful planning and protection. To safeguard owners, contractors, suppliers, and other stakeholders, you should ensure that the necessary bonds and insurances are in place. Depending on the project’s complexity, additional bonds and insurance policies may be required.
Construction-related Bonds
Construction bonds act as a safety net for owners, protecting them from risks like poor performance, company default, non-payment, and warranty issues. Bonds offer unique features, safeguarding project owners and contractors from financial problems during and after construction.
Contractors are often required to post bonds for significant projects, to make sure their compliance with specific obligations and produce high-quality work. If issues arise, the insurance company will reimburse the owner for extra costs due to the contractor’s negligence.
Bond costs can be significant for contractors, and would depend on their financial situation and past performance.
Common construction-related bonds include:
1. Bid Bond. To ensure that the contractor honors its bid proposal and eventually enters into a contract, a project proponent would usually require potential bidders to post a bid bond so as to provide them with peace of mind and reduce fly-by-night contractors from participating, backing out, or forgetting bid-related requirements. The bid bond may either be a set amount or a percentage of the project cost.
2. Performance or Surety Bond. To protect the project from unfinished work and financial ruin, the project owner typically requires a contractor to post a performance bond. The owner will hold such bond, but the bond will be procured and paid for by the contractor and its subcontractors. The performance bonds, at the minimum, are usually equivalent to the down payment given to the contractor and expire upon contract completion or receipt of certificate of completion.
3. Payment Bond. A payment bond is like a fallback that makes sure the contractor keeps its promises to workers, subcontractors, and suppliers. Under a payment bond, if the former fails to pay their subcontractors and suppliers, the latter can lay claim to the bond. The cost is usually dependent on the contractor’s credit history.
4. Warranty or Guarantee Bond. Ten percent of the billable amount is usually deducted from each progress payment. At the end of the project, most contracts allow the owner to keep the money for a year or the agreed warranty period before it is released to the contractor. In lieu of retaining the cash amount, the owner may opt to release it to the contractor in exchange for a warranty or guarantee bond in order to protect the owner from construction defects like workmanship, poor quality materials, and equipment failure and malfunction.
Parallel to this bond, a retention bond can be purchased by subcontractors to also ensure that they get paid for their work. Instead of the general contractor holding 5-10 percent of their payments, subcontractors can buy a retention bond to ensure that they can get their full progress payment at each billing period.
Insurances
Construction projects normally use two main categories of insurances:
1. Property insurance. This is intended to cover construction-related damage, such as replacing broken or dented building components due to various possibilities like typhoons, flooding, fires, or other disasters. One such type of insurance is the Contractor’s All Risk Insurance. The CARI provides comprehensive coverage for losses and damages to the contractual works, plants, machinery, equipment, and injuries.
2. Liability insurance. This insurance covers claims from carelessness or mistakes, protecting workers from damages caused by negligence. One example is the Comprehensive/Commercial General Liability (CGL) policies, which typically cover property damage or bodily injury to third parties but exclude claims for defective work or materials. In addition, contractors also secure Accident Insurance for Workers to protect their workers from accidental death and bodily injury.
Ensure that all necessary bonds and insurances are in place throughout the project’s lifecycle, from start to completion. This proactive approach will not only safeguard your interest as owner, but also that of your contractor and stakeholders while mitigating any potential accidents and risks.
References used include: “4 Common Construction Project Bonds and Insurances in the Philippines” by Engr. Edward Reyes (pinoybuilder.ph), “Construction Bonds: A Guide for Contractors and Suppliers” by Dawn Killough (levelset.com), and Construction Insurance and Bonds – A Primer” by Stephen Berezowskyj (singleton.com)
* * *
Henry L. Yap is an Architect and Fellow of both Environmental Planning and Real Estate Management. He is one of the Undersecretaries of the Department of Human Settlements and Urban Development.
