How Construction Bonding Works

How construction bonding works

Are you looking to hire a construction company to complete a project for you?  Are you familiar with a contractors license bond?  If you are unfamiliar contractor bonds and how they work, that’s fine we can help you understand them and why any construction company you work with should have them in place.  A contractor bond is assurance that the company you hire will perform as they have promised.  If that doesn’t happen then the company issuing the bond will pay you damages.  That’s a simplification of how construction bonding works.  Bonds should always be in place before you work with a construction company, it is one of the many things that help regulate the industry.

There are four different bonds that are the most common in the construction industry, let’s look over them.

Bid Bonds

This type of bond will protect you, the project owner as it assures that the contractor will honor the original bid amount.  You can sue both the contractor and the issuer of the bond to recover costs.  Bid bonds are typically included in the bid package along with all other financial information that goes with bids.  Not every project will require a bid bond but if you have a large commercial project then they are recommended.

Performance Bonds

This type of bond is pretty self-explanatory it assures that the contractor will complete the job according to the terms of the initial contract.  You’ve seen half completed projects never finished, this will help protect you from that.  This type of bond can also help to protect you from poor quality work by the contractor.  Should the job be left incomplete or it is very poor quality work or long past the deadline for completion then you have some recourse.  The bond can be held liable to complete or fix the project.  The surety company will bring in a replacement contractor to finish everything off.  Performance bonds will go hand in hand with payment bonds since both are there to protect you from financial loss because of the contractor.

Payment Bonds

This type of bond will make sure that your contractor pays the subcontractors and suppliers.  Should something happen and for example’s sake let’s say the electrician didn’t get paid for his portion of work on the project.  He can go after the surety for the money who will in turn go after the contractor to be reimbursed.

Contractor License Bonds

This type of bond ensures that a contractor is licensed to work on your project.  A contractor must purchase this type of bond in order to qualify to even bid on a project.  Working without contractor license bond can cause all kinds of problems for a contractor and that can include heavy fines and revocation of their license.

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Invest in Your Business Growth

Invest in Your Business Growth

You have been working in construction for a while now, and you finally have your own company.  So far you have only taken on small projects but it’s time to grow and get serious about your business.  It’s time to invest and start growing.  One of the things that you will need to invest in before you start taking on bigger projects is a contractor bond.  A contractor bond will protect you as a contractor and the project owner from liabilities in the event of unethical business practices.  It makes you safer and your customers feel safer.   A contractor bond can protect you the contractor, the company that wants to hire you to perform services along with the agency that issues the contractor bond.

Reasons to get a contractor bond:

  • The contractor bond helps protect the public by assuring that the services that you provide will cause no harm. This helps you earn the trust of prospective customers especially when it comes to commercial clients.  Commercial customers are far more cautious, they don’t like being on the hook for any liabilities and this assures them you are ready and able to handle the job.
  • If anyone should be harmed on the job site due to negligence then a suit can be filed against the bond to recover costs. Again this means that you take on liability rather than your clients.
  • A contractor bond means that you’re serious and that you are going to maintain professional standards while doing the job. The bond makes this legally binding and you are guaranteeing that you will meet your obligations.
  • The Construction industry is rife with mistrust and a certain amount of volatility. There have been outrageous cost overruns and unethical construction companies throughout the years and while you don’t fall into that category you still have to assure your customers of that fact.  Both residential and commercial customers want to know that you will show up and get the job done properly at the price you quoted.  Having contractor bonds in place makes them feel safer.  They are assured that they have some recourse should you bolt with all their money in the middle of the night.

Invest in yourself and your business with a contractor bond.  It will not only protect you from various liabilities, it will also give your clients the peace of mind that they deserve.  If you want to grow and take on big commercial projects then a contractor bond is a necessary part of doing business, just like equipment or any other investment in your company.

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