When you are awarded a contract for a new project, it's easy to want to dive right in and get into the meat of the work.
But if you don't get a contractor's bond first, you may have trouble that has nothing to do with the quality of your construction work. Hiring an uninsured, unlicensed, or unbonded contractor is a risk many homeowners won't take.
Here, we're breaking down what a contractor's bond is, the various types of bonds, and why you need one to succeed.
Types of Construction Bonds
First, let's answer the most basic question: what is a construction bond?
In the simplest terms, a construction bond is a type of surety bond used to protect a construction project against financial loss if the contractor fails to complete the project or meet project requirements.
There are several different types of bonds, depending on what you want it to do for you. Here are four common ones.
Contractor License Bonds
A contractor license bond is an important type of surety bond.
Aside from helping you, it also helps protect others affected by unethical or costly business decisions.
Contractor license bonds protect the contractor (you), the company that hired you to work, and the bond issuer. Think of this bond as assurance that you will provide ethical and professional services while indicating that you will provide services that won't harm the company that hired you.
A bid bond serves as protection if the contractor (you) decides not to sign a contract after winning a bid.
It's often required for a contractor after submitting a bid in the public sector. This situation most often occurs when a contractor discovers they underbid on a project and decides not to go through with it.
If that contractor is carrying a bid bond, as they are often required to, the bond company pays the owner a set amount, typically 5 percent of the bid amount, and pursues the contractor for the remaining amount.
For obvious reasons, these types of bonds are popular for those who are hiring contractors.
The name of this bond, like the others, is pretty self-explanatory.
A contractor, usually the principal contractor, will take out a performance bond to guarantee that they will complete the contract in accordance with the agreed-upon terms.
If the contractor fails to do so, the hiring company can use the performance bond to complete the contract, usually by either giving the contract to a new contractor or by paying the costs for the owner to complete the contract on their own.
In the construction industry, a payment bond is often issued with a performance bond to form a three-way contract between the owner, contractor, and subcontractor.
Essentially, it's a way to make sure that all subcontractors and other laborers will be paid upon the completion of the project. In many cases, it may act as a replacement for a mechanics' lien.
When the principal contractor fails to pay their subcontractors and laborers, they might collect under the payment bond.
Surety Bond Basics for Contractors
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Seven Reasons You Need a Contractor's Bond
Now that you know the basic types of contractor's bond, it's easier to understand the ways that having one of them could benefit you--and why you need them.
Construction bonds offer a variety of protections for you, your subcontractors, your laborers, and the owners. Sometimes it might seem like a pain, but in the long run, you're better off having them.
Here are seven reasons why a construction bond is good for your company.
1. You Need to Get Licensed
For starters, you need to get licensed.
Certain industries require surety bonds in order for your company to be properly licensed. In fact, there are federal, state, and local laws that prohibit unlicensed contractors from working legally.
Contractor license bonds are one of the common licensing bonds for construction contractors. No matter how good your track record is, employers need these bonds as a guarantee that you will ethically fulfill your contract with them.
2. You Need One for a Construction Project
More than just licensing, you need these bonds in order to take a construction project in the first place.
We outlined the various types of bonds to illustrate the point. Each type of bond covers a different potential problem--issues surrounding a bid, licensing, paying the workers needed to complete a project, lackluster performance or failure to complete the contract.
In many ways, they're a sign of good faith between you and your employers. By taking out these bonds, you're showing your employers that you fully intend to perform the duties they hired you for.
3. You Need Protection Against Uncertainties
Of course, bonds aren't just about protecting your employers' interests--the bonds are also about protecting yours.
Any contractor worth their salt knows that sometimes, things come up unexpectedly in a project. A smart contractor will plan ahead for potential problems.
Contractor bonds do exactly that. They provide protection for claims filed against your company. If issues come up that aren't your fault, the surety company can pay out the claim until you reimburse them.
4. You Need One for Court Proceedings
If things really go sideways, all the way to a court, a court may require you to get a court bond before they can take further action.
A court bond is a dollar amount set by the judge that must be paid by the defendant as a way to ensure that the defendant shows up to their trial date. It may also be non-monetary, which means that the judge believes the defendant will return on their own without disincentives.
Basically, they're a way to protect against possible losses in a court proceeding. They're often seen as high risk, which makes them expensive to obtain.
5. You Want to Protect Your Business
There's a certain type of bond, called a fidelity bond, that acts as an optional form of additional protection for your business.
Basically, a fidelity bond covers potential losses due to theft, fraud, and embezzlement from your employees. It's like extra insurance for the employer (you).
There are many different types of fidelity bonds, some of which cover all employees and some of which only cover specific employees. There are even fidelity bonds that protect against fraud related to your pension or benefits plan.
6. Homeowners Have a Right to Know
Beyond just protecting your business, bonds offer certain key benefits to the homeowners who hire you to do work for them, and homeowners have a right to know whether you and your company are bonded.
For example, under the law, contractors are legally obligated to inform homeowners whether or not they hold a contractor's license bond. And if you don't have one, you suddenly become a risk that many homeowners may not be willing to take.
Having these bonds is a stamp of professionalism for your customers. It shows them that when they hire you, they can trust you to do the job right.
7. It Makes It Easier to Go After Larger Jobs
Finally, having these bonds is a stamp of professional courtesy that makes it far easier for your company to pursue larger, more profitable jobs.
Think of it this way: homeowners with smaller jobs want contractors who are bonded. This helps you build a track record of winning and completing work bids for smaller projects.
This helps bolster your company's reputation for success, which isn't just good for winning more small jobs. It helps ensure that when the larger job that's perfect for your company works its way up the grapevine, you'll have a competitive advantage.
The Bond Services Your Business Needs
If you need to get a contractor's bond to help your company get one step ahead, you've come to the right place.
McKnight Insurance Services is proud to offer a variety of bond services for all of our customers' needs, whatever they may be, from bid bonds to contractor license bonds to performance and payment bonds and more.
If you need a quote on surety bond services or would like to see what the surety bond process entails, click here to get started with a quote.
If you have questions or would like to start working with us, use our contact page to get in touch.
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Surety Bond Basics for Contractors
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