Reasons Underlying a Mandatory High Penalty Construction Contract Bonding System

Abstract

Mandatory high penalty conditional bond in public works features the current U.S. construction contract bonding system, which is unique to the low penalty unconditional bond, a more popular choice on the international market. The diversity of construction contract bonding practices puzzles many transitional economies in their globalization processes, when they are to establish or reform their construction contract bonding system. Based on the research into surety bonding mechanisms, this paper illustrates that the penalty requirement is a controlling factor, and that only high penalty conditional bond and low penalty unconditional bond can bring a state of equilibrium to the market. The conditional bond is fairer, and a high penalty conditional bond is a more functional choice than the low penalty unconditional bond. However, lack of enough demand and experienced sureties hampers the application of high penalty condition bonds. Being the nominal owner of public works, the government can always save its money from construction contract bonding system and start up the demands. Therefore, a mandatory surety bonding system in public works with a high penalty requirement should be a good public policy choice for the government.