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The basics of surety bonds in construction in New Jersey

On Behalf of | Oct 3, 2022 | Construction Law |

The construction industry in New Jersey carries significant risks. Contractors need to be well-versed in the legalities of the construction process to protect themselves. One way to do this is to understand surety bonds and how they work.

Understanding a surety bond

A surety bond is a contract between three parties: the obligee, the principal, and the surety. The obligee is the party who requires the bond, usually the owner of the project, while the principal is the contractor who will perform the work. The surety, on the other hand, provides a guarantee that the work will be performed according to the terms of the contract.

If the work is not performed as agreed, or if there are cost overruns, the surety can be required to pay damages up to the amount of the bond. Sureties are typically large insurance companies with the financial resources to pay claims.

Reasons why surety bonds are required in construction

In New Jersey, the state construction law requires that public works projects over $200,000 be bonded. This is to protect the taxpayers in case of contractor default. Private owners may also ask for surety bonds as a condition of awarding a contract. Banks and other lenders may also call for bonding to protect their investment in a project.

Getting a surety bond in New Jersey

Sureties will only issue bonds for contractors that they have carefully vetted and determined to be financially sound and capable of completing the work. The surety will also want assurances that the contract terms are fair and reasonable and that the project is not too risky.

To get a bond, the contractor will typically need to provide the surety with financial information, references and other documentation. The surety will also require collateral from the contractor to secure the bond.

If you are bidding on a public works project in New Jersey or the private owner requires bonding, you will need to obtain a surety bond. The three common construction surety bonds available are bid bonds, performance bonds, and payment bonds. Bid bonds are used to protect the owner in case the successful bidder defaults on the contract. Performance bonds protect owners from financial loss if contractors fail to perform according to the terms of the contract. Payment bonds protect subcontractors and suppliers from non-payment by the contractor.