Benefits Bonds Are Better For The Construction Project Owner Bonds Are Better For The Contractor Bonds Are Better For Subcontractors and Material Suppliers Conclusion Bonds Are Better For The Contractor Diminished Borrowing Capacity For the most part, Performance and Payment bonds are issued on an unsecured basis. That is, they are provided on the strength of unsecured and unregistered personal and corporate covenants. The issuance of bonds has no effect on the contractor's bank line of credit. Quite the opposite is usually the case with letters of credit. Almost without exception the bank will reduce a contractor's operating line by the amount of any outstanding letter of credit. Having assets tied up, or an available line of credit diminished, is counterproductive from the standpoint of the owner as well as the contractor. The contractor's ability to perform the contract is directly linked to the contractor's financial condition. Assets that are pledged to support a letter of credit may not be available if funds are needed unexpectedly-not an unusual situation in the risky business of construction. It is ironic that by requiring a letter of credit, a construction purchaser may be inadvertently bringing on the very problem they are seeking protection against. Cost of Protection From a cost standpoint, the contractor may find that the letter of credit is more expensive, especially if it must be obtained in an amount that is double the contract price or must remain in force for a number of years after the substantial completion of the construction work to cover contingencies. On the other hand, a surety bond premium is based on the contract price and is paid when the bond is issued and adjusted accordingly if the contract price is modified. Benefit of Sureties' Underwriting The surety's prequalification judgement is also important to the contractor. If the contractor is unable to find a surety company that is willing to provide Performance and Payment Bonds, it is likely that the contractor may be attempting to undertake a project in which it is very likely to fail. Whether supported by a letter of credit or a bond, a contractor default usually means that the contractor's business will fail. Thus, a surety company's support of an unqualified contractor is not helpful to the contractor. Enhanced Credit Subcontractors and material suppliers may be more willing to extend credit to the contractor or offer credit at better terms if they know they are protected by a Payment Bond. Since under a letter of credit, financial protection is questionable or nonexistent, subcontractors and material suppliers may be reluctant to extend credit. This puts a greater demand upon the contractor's financial resources which may already be limited by the letter of credit's collateral requirements.
