b'LEGAL COLUMNBONDING IN A DOWNTURN M A N A G I N GT H E R I S K O F C O N T R A C T O R I N S O LV E N C YBY ALEXANDER SPRAGGSne of the greatest risks to construction projects is theOne of the best ways to protect your project from the risk of O insolvency of one of the parties involved.contractor insolvency is to require your contracts to be bonded.This risk is exacerbated in a bear market. Not only are contractorsHOW BONDS WORKon the whole more likely to become insolvent, but contractors thatThe two types of relevant bonds are performance bonds and are struggling and at risk of insolvency may bid low on contractslabour and material (L&M) bonds. There are three parties to out of desperation for work and cash flow. On the other hand,these bonds: the obligee, the principal and the surety. If a prime contractors with steadier hands on the till during a constructioncontract is bonded, the owner is the obligee, the general contractor downturn will know not to underbid a project when times is the principal, and the surety company is the surety. In the case are tough. of a subcontract, the general contractor is the obligee and the subcontractor is the principal.In the case of a performance bond, the surety ensuresfor MARKETPLACE the benefit of the obligeethat the bonded contract will be performed, up to the penal value of the bond (typically half the value of the bonded contract as a whole). In the case of an L&M bond, the surety ensures that all parties providing labour and materials to the principal will be paid in full.YOUR BUILDING IS MORE THANWhere the principal to a bonded contract becomes insolvent, a ITS MATERIALSbond will help ensure that the contract is performed and that the AND STRUCTURE. labour and material providers are paid and have no claim to a lien.When we build, all thingsBeyond the fundamental protection against insolvency that bonds are considered. Every detailare intended to provide, there are several other aspects of bonding matters. that help mitigate the risk of a principal becoming insolvent.UNDERWRITING THE RISKchandos.com When a surety is asked by a contractor to bond a contract, the bonding company will underwrite that bond by analyzing the 38 SOUTHERN INTERIOR CONSTRUCTION ASSOCIATION'