Have you ever come across the term “contractor’s bond”? If not, that’s OK because in this article, we’ll explain everything you have to know about the process and what it means.
First of all, you should know that obtaining a contractor bond is mandated in the majority of states. To prospective customers, they represent assurance that the business will adhere to industry-specific operational standards.
“So, what’s a contractor’s bond?”
Consumers and businesses alike can feel safe knowing they will be safeguarded against dishonest practices and subpar quality.
A contractor license bond guarantees that the contractor will adhere to state or municipal licensing standards, as opposed to a performance bond, which guarantees that the contractor will execute the terms of a contract. A wise idea is to take a peek at contractorbond.org to find out more helpful info about the topic.
Next, we want you to understand that these bonds constitute a legally binding agreement between a Principal, an Obligee, and a Surety.
There are three parties involved in a performance bond transaction: the principle (the business owner requesting the bond), the obligee (the entity requiring the bond), and the surety (the insurance company ensuring the obligations of the principal and obligee). The surety firm would front the money to settle a claim, only to be repaid by the principal.
How does it work, though?
This is where it gets interesting, folks! Any party harmed by a contractor’s failure to perform in accordance with the conditions of the work contract may submit a claim against the surety bond for monetary compensation equal to the cost of the losses.
If a contractor signs a performance bond promising to finish a job in 100 days, but it ends up taking 120 days instead, the other party to the bond (the obligee) can file a claim for damages to cover the extra expenses caused by the delay.
In the event of a valid claim, the surety firm will make a settlement (payment) and then pursue reimbursement from the contractor holding the surety bond (together with any applicable interest and costs). The bonded party is always financially responsible to the surety firm, but the surety company always guarantees payment.
Why do contractors need it?
Construction bonds are pretty much used when the project owner wishes for an extra layer of financial security. While the protections provided by the construction contract are important, resolving a breach of contract in court can be time-consuming and costly.
The awesome thing is that the contractor and the project owner may rest easy knowing that all of their terms will be met because of the bond, which is especially important for larger projects. The surety business that issues contract bonds evaluate applicants based on their financial stability, the nature of the work, any waiting lists, and the contractors’ track records on similar projects.
Who can get one?
Well, the person that applies for one, is accepted and pays the premium, of course. If you want to get your hands on a contractor’s bond, you need to submit an industry-standard surety bond application ASAP. The application will pretty much want to know details about your business, history, and financial situation.
The surety bond business may also request additional paperwork to further assess your financial stability and credit risk.
Moreover, you should also know that contractor bonds can range in price from low to high, depending on the applicant’s creditworthiness. After your application has been reviewed and approved, the surety bond business will low-key provide you with a pricing quote to issue a bond for a period of 12 months, or longer if necessary.
Do I need to renew it?
Occasionally, but not always. You must renew your contractor’s license bond each year in order to keep your license and business in good standing.
Let’s see, what else? Oh, during renewal, your credit will pretty much be recalculated (which could result in a higher or lower cost), and you will be required to pay the payment once again. A contractor doesn’t have to renew a performance bond once the project is over because the bond is contingent on the completion of that job.
