Material Labor Bonds Information

 

Material Labor Payment
Surety Bonds For Construction Projects

 

Material labor bonds are a type of performance surety bond use in the construction industry.

Material labor Bonds for Construction Projects are an agreement between three parties:

* The Principal - Construction Project Owner
* The Contractor - Construction Project Contractor
* The Surety - Construction Project Surety Bond Issuer

Construction material labor payment surety bonds ensure that material purchase and labor payment obligations outlined in the project contract and plans are fulfilled by a principal.

Usually a construction contractor, the principal, is the party who obtains the bond and promises to pay for material and labor needed to complete the construction contract duties. The party who requires the material labor bond is referred to as the obligee, usually the owner of the project. The bond gives them protection under the agreement.

The surety is the party that guarantees that the principal will fulfill their material purchase and labor payment obligations outlined in the construction project plans.

Construction contract surety bonds are often required to:

* Get a construction permit
* Bid on a construction project
* Be awarded a project and
* Begin work on a project

 

 

What are Material Labor Bonds?

 

Material labor bonds ensure that the materials needed for the construction project will be bought and paid. These surety bonds also insure workers on the project will be supplied and paid.

 

Components of a Material Labor Bond

 

To understand exactly how material labor bonds work in construction, let us look at the parties involved in this type of bond.

Principal (Contractors)

The principal or the general contractor is the party that secures the bond for a price to work on a construction project. This price is generally a fraction of what the bond covers. Construction bonds work as an incentive for the contractor to complete the project because they might have to pay back the bond if contract terms are not fulfilled.

Property Owners (Obligee)

This party requires a performance bond for contracting the construction work to the Principal. They can be government, individual, or any other type of entity. The bond ultimately protects the property owner against the risk of not getting the job finished. In case the contractor fails to complete the project on time or does not meet the expected standards, the oblige receives compensation under this agreement.

Surety Companies

They are the financial institutions issuing the bond. Surety companies prequalify contractors to minimize risk to them. Whenever a contractor fails to fulfill the obligations, it is the surety that compensates the property owner until the contractor pays back the surety. This is why the surety only provides bonds to qualified contractors.

 

How Material Labor Bonds Work

Material labor bonds guarantee the construction material needed to perform the project will be paid for by the contractor. The bond also guarantees the required workers on the project will be supplied and paid. If the contractor fails to abide by the material and labor reguirements set forth in the contract the bond will be held liable for the cost of any damages incurred.

When a contractor fails to meet his material and labor obligations, the property owner can file a claim against the Material Labor bond. The surety validates the claim and takes the necessary action in response. It investigates the matter to determine whether there is an actual breach, assesses the incomplete work, and the cost of damage or loss, and may hire another contractor to complete the job.

 

Real Life Example of a Material Labor Bond

 

Let us try to understand how material labor bonds work for construction projects with the help of a real life scenario. A state government, for example, employs a contractor to perform construction project work.

The contractor must fulfill the obligations for materials and labor required for the project. The government must pay the contractor once the job is done. The bank ensures that the materials and labor required is furnished and paid for by contractor. If the contractor fails to meet the materials and labor expectations of the government, the bank has to compensate it for the loss. The bank, then, comes after the contractor for reimbursement.

 

Material Labor Payment Surety Bond Costs

 

The cost of material labor bonds will vary depending on the type of project, the amount of coverage needed and other factors. Generally, surety bonds range in cost from 1% to 15% of the total contract value. The contractor’s credit score, experience level, and other factors can also affect the cost of surety bonds.