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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