Contractor Bonds Explained

Contractor Bonds Explained

Are you a contractor in the construction industry?  Are you familiar with contractor bonds and why you need them for your business?  If you are unsure what contractor bonds are or how they pertain to your business don’t worry we can help you.

Contractor Bonds Explained

A contractor bond is simply an assurance to the person contracting your services that you will perform them as agreed.  In the event that you fail to perform as agreed the surety company, those are the people that issued the bond, will pay damages to the person or company that contracted you for services.  The amount of the claim will then be recovered from you, the contractor, by the surety company.  California among other states require that the bond is secured in the construction industry.  Contractor bonds help keep the industry regulated and honest.

Here are the Different Types of Bonds Available for the Construction Industry

Bid Bonds

This type of bid is used to protect the project manager or building owner and it holds the contractor to the original bid amount.  We have all heard horror stories of projects going way over budget or stalling because of cost overruns.  This protects against that, the project owner now has the ability to sue the contractor and the bond issuer to hold to the bond.  These types of bonds are normally given with the other financial information when a bid is submitted.  These types of bonds are not required for all projects.

Performance Bonds

As its name indicates this type of bond guarantees that the contractor will complete the job according to the terms of the original contract.  It makes sure that the job will be completed satisfactorily as it has been outlined.  This type of bond will protect the project owner from poor quality work or from having an unfinished project.  Should the contractor go beyond the deadlines for completion, or leave the project unfinished without using a replacement contractor they must compensate the owner for not completing.  It protects the contractee from suffering losses from the fault of the contractor.

Payment Bonds

This type of bond makes sure that each and every supplier or subcontractor will get paid for their work on a project.  Should the contractor fail to pay for supplies or services then the subcontractors will be paid by the surety.

Contract License Bonds

This allows for the contractor to be licensed for the project, and the contractor will have to secure this type of bond in order to qualify to bid on a project.  If you fail to secure a Contract License Bond then you can face fines and lose your license.

Qualifying for a bond is part of doing business in the construction industry, but that doesn’t mean it is easy.  If you understand the different types of bonds and how they work you can appreciate how the bonding process can protect you and your customers.