The construction business is evidently a risky business. In the present construction business one-half of all the firms will be declared out of business because of the difficult nature of having to deal with labor and industry demands. Labor difficulties, equipment problems, economic downturn and material shortages among other problems could cause a contractor to fail making him leave the business standing still (Bueno 2014). Because of the risky nature of the construction industry, there is no project owner that can afford to hire the services of a gambling contractor. How can a project owner use a low bidder to award his public contract while he is not sure whether the contractor can be dependable?

Insurance and bonds are used in the construction project to provide construction assurance and financial security on a construction project with a confirmation that contractors will perform they needed project and give financial awards to the material suppliers, subcontractors and laborers. In simple terms, bonds and insurances are a surety that the party offering the contract is guaranteed by the other party that they will actually perform the contract (Bueno 2014). In a building project, there are three parties involved; the project owner, the one taking the contract and the surety and these parties represent the bid, the performance and the payment bond.

Insurance and bond types

The bid bond is developed for providing financial assurance to the owner that the bid has been acquired in good faith and that the one acquiring the contract is willing to enter into a contract for the quoted price. The performance bond also provides all the requirements needed for performance and payment of the contract.

The payment bond is a guarantee that the one willing to perform the contract is also willing to pay a certain amount from the total bid to his material suppliers, laborers and subcontractors as well as all other parties associated with the project.

The performance bond is a protection to the owner of the project from any future financial loss in the event the construction fails and the constructor is unable to accomplish the contract with reference to the terms and conditions of the contract (Bueno 2014). In Chester’s cases study, performance bond was broken because as a constructor he failed design and develop a thorough building which resulted in leaking’s. The contractor in this case was to blame because probably he did not purchase the right materials needed for the construction or did not pay the laborers the exact amount they should be paid so they performed substandard work.

Insurance and bonds performs the functions below

1. Guarantee that the bond project will be brought to completion according to the conditions and terms of the contract at the determined price.
2. Bonds and insurance also guarantee that material suppliers, laborers and subcontractors will be well paid even in the event of constructor default (Doloi, Iyer, & Sawhney 2010).
3. Insurance and bonds makes the construction process a smooth one by stipulating all the terms and conditions of the project.
4. Insurance and bonds decrease the possibility of having the contractor divert project funds into his personal use.
5. Insurance and bonds also act as a channel between the owner of the project and the surety.
6. Insurance and bonds also reduce construction cost in some cases of building by facilitation the application of competitive bids.

The importance of insurance and bonds in Dubai

A primary importance of using insurance and bonds can be derived from the definition of a construction bond. A construction bond is referred to some form of surety bond which can be used by a certain project investors to defend the project owner against any adverse events that would cause failure of project completion, disruptions as a result of insolvency among builders and failure to meet the specified contract demands (Burton 2000).

In the event that the bond is broken by default, insurance and construction bonds have legal obligations that protect the owner as well as the contractor (Market Report 2014). Most times in the event of failure, insurances and bonds may declare the right for the contractor to re-bid the job in order to bring out a complete project or replace the contractor or give out the money paid for performance.

With construction bonds, the risk of not completing the project is shifted from the owner to the contractor. It is essential for every engineer and project contractor to have these bonds and insurances because they spell out the rights of each party in the process. Judging from the case study involving Chester and Daryl, we can clearly see why Chester was judged for failure to design a building that is up to standards. From this case study, we can clearly link the fees attached to Chester with the performance bond and how the law requires the contractor to face punitive damages when they fail to do a good job.

In Dubai, most construction projects if not all need every contractor to provide the owner with a performance bond which should guarantee performance under the stipulated contract (Elliot 2015). In Dubai, performance bond is basically required to provide every employer with a fast and efficient solution in the event the contractor fails to carry out his obligations as defined in the contract. This applied to all construction companies registered under Dubai and its law and the larger UAE.

Before understanding how performance bonds works in Dubai, it is essential to have an understanding of the difference between guarantees and performance bonds. In Dubai, a guarantee shall only be paid in the event the loss is approved on a primary contract. The right of the employer to liquidate the performance bond in the Dubai construction market can only be triggered when the contractor or any side of the contractor decides to default. The employer has no absolute right to make any liquidation decisions on a performance bond and therefore such decisions should be exercised with maximum caution. The significance of the performance bond in Dubai is evident when the relationship between the contractor and the employer turns sour. Looking at the Dubai financial crisis that occurred towards the end of 2008, most business owners caused a lot of harm to many contractors who were not being paid at that time and were later subjected to liquidation of their performance bonds (Elliot 2015).

This action to some extent caused a lot of difficulties to contractors when they later approached banks to provide them with performance bonds. In the UAE commercial code in which Dubai also operates upon, the Federal Commercial Law act No. 18/1993 provides a regulation of issuance of performance bonds and the conditions in which the employer can liquidate performance bonds. In the UAE market, the surety firm must be fully satisfied that the one taking up the contract is operates a profitable, well managed, fair deals, promise keeping actions and all its obligations in a timely manner. With the existing evidence in performance bonds and surety bonds in Dubai, these aspects have evidently play significant functions in contributing to the industry success (Elliot 2015). In increasing the success of the industry, performance and insurance bonds have allowed the construction industry to continue sustaining its position among the largest contributors to the growth and stability of the nation.

Why do we use bonds and insurances in construction?

The use of insurances and bonds in probably the most popular technique that is used to ensure an employer is protected from the negative results on a contractor who is unable to perform. In a nutshell, bonds are used solely for the protection of the employer against a non-performing contractor (Elliot 2015). With the dangerous nature of uncertainty in the construction market which is presently being reinforced by high profile construction agencies, employers are becoming increasingly concerned than in the past to make sure that they do not pay for the fines in the case of the contractor fails to perform according to the building contract. It is very vital therefore to use bonds and insurances for all contractors, employers and subcontractors in order to have a deeper understanding of how to protect oneself from underperformance claims (Hosie 2010). A practical advice to subcontractors and contractors is that they should engage in careful consideration of the conditions of every bond to ensure that the bond obtaining cost is reflected in the contact price. On the other side, employers should also recognize the fact that different bonds have different prices and a bond of high price will attract an increased contract price. Most times, a balance could be attained by the protection level needed by the employer and the likelihood of the contract price increasing.

Smooth operation of Dubai insurance-construction system

The option of performance bond is being weighed in Dubai with a feeling of replacing it with surety bond. According to Nambiar (2010) Dubai has grown with a roar in its new design and implementation of strategies in the construction industry. The country’s operations in insurance and construction industries are smooth with a reflection of the best in terms of infrastructure and positioning (Nambiar 2010). This means that country has very strong laws and regulations that compel contractors to produce nothing but the best. In Dubai, failure for the contractor to design as per the terms of the contract brings a very heavy price on the contractor and some heavy burden on the employer as well. The tough situation in Dubai with banks with relation to performance bonds and contractors has not been loosened.

Before issuing performance bonds, Dubai banks do not bond or lend on contractors who do not provide previous work experience and this is the main problem for contractors and employers. In this manner, I would say that probably banks are being warned on the waver performance nature of contractors and certain construction employers. This phenomenon is on a higher rise causing a smooth flow of operations within the construction industry creating exceptional performance in Dubai’s infrastructure and world positioning (Nambiar 2014). In Chester’s case study if it were in Dubai, banks would not have issued Chester with the document on performance bond if there is no recommendation to show he can deliver quality. No reputable insurance company at the same time would have permitted Chester to use their recommendation for building without documents to show that he can deliver. The success in Dubai that makes it at the top most position worldwide in construction is smooth in its determination that every contractor, subcontractor and employer knows the consequences of designing substandard buildings which included being denied license to fully operate as an engineer.