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What you need to know about Warranties, Insurance, & Bonds

Warranties

Construction warranties exist between one party to another party so that contract requirements will be met. For example, in a contract between a General Contractor and an Electrical Subcontractor, there will almost always be a warranty clause that states the selected Electrical Subcontractor contracted to do work X on job Y warrants their work from defects, be up to code, and abides by all rules and regulations of the project's locale. Now, suppose a failure occurs at any point before, during, or after a project's completion with the electrical work. In that case, the warranty guarantees the responsible party will work to fix the unsatisfactory work.

One type of warranty that is commonly used is an express warranty. Express warranties are almost always written in a contract agreement, part of the general conditions, or in the project specs. It's in the best interest of Contractors to warrant their work from defects and conform to the contract requirements because this will mitigate any change orders and favor their subcontractor evaluation positively. However, if there are defects, then the fix falls onto the Subcontractor to bring the work in line with the contract documents and specs.

Bonds

Contractor bonds are legally binding agreements between three parties:

  1. Project Owners

  2. Contractors

  3. Surety Company

Depending on the specific bond type, they all have different agreement conditions, but they all serve the same function - to protect and guarantee. These bonds function as a security blanket that guarantees compensation to the Owner if the Contractor violates the agreement conditions. Each bond is issued for a specific amount, and this specific amount is the maximum the bond will payout. A payout will occur when the Contractor violates a contract condition.

Some examples of bonds include:

  1. Bid bond

  2. This bond is required to submit a bid on a contract. This particular bond type guarantees the bid submitted and, if awarded to the Contractor, will be at a price submitted.

  3. Performance bond

  4. Like a bid bond, the performance bond ensures that when a contractor is awarded a project, this bond will guarantee the Contractor performs the work as defined by the contract documents.

Insurance

Construction insurance is an insurance policy that protects construction projects. In reality, the term "construction insurance" generally refers to insurance related to construction projects, and it is not itself a basic form of insurance. For example, let's say Ivy Tech wants to build a new campus. As the Owner, they know several project-related items need insuring, such as the building itself, materials, the workers, and equipment. The project type determines the insurance type required.

For example, one of the most common types of project insurance is Builders Risk Insurance. This insurance is for buildings and structures that are under construction. This insurance type can cover things like foundations, paving & fencing, and any landscape items. The key here is that this insurance only covers the physical building and property. This is important because insurance coverage begins at project start and ends at Substantial Completion or Project Closeout. As with any insurance, there are coverage limits and payout limits. One other key element is who buys the insurance, which depends on the project type. In all cases, the contract will outline who is responsible for buying said insurance. More often than not, the Owner will buy Builder's Risk, but there are cases where the Construction Manager and even Contractors purchase this insurance type.

One last thing to note is what is not covered by this insurance type. This type does not cover things like injuries, vehicles, and workman's comp. If a project needs this coverage, then they must purchase separate policies or riders.


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