Tag Archives: payment bonds

Contractor Bonding

I was a general contractor for years, registered in multiple states. From time to time we would have clients question whether we had the capacity to perform. In other words, “would we finish the project as promised?” The states I was registered in all had contractor bond requirements, in order to secure a license. In the event we would have failed to perform, the bond was an avenue for our clients to receive monetary compensation.

For the average building owner, individual project contractor bonding can create a piece of mind situation.

Three types of bonds are used in construction. Bid bonds are issued during the bidding process. They constitute a guarantee a company will sign a contract for their specified bid price if they are the low bidder. Rarely are these seen, other than for government projects. Performance bonds ensure the contractor will complete the job according to the contract. If they fail to perform, the performance bond guarantees no money will be lost in bringing in another contractor to complete the work. Payment bonds guarantee all suppliers and subcontractors will be paid for work performed.

Contractor bonding offers a number of benefits to project owners, who often face enormous financial risks. A builder must be thoroughly investigated before they are issued a bond. By requiring bonds, the owner is getting a guarantee the builder is financially qualified to take on the project and has a solid performance history. Jobs which are bonded are much more likely to be completed without incident because of the huge financial and legal penalties contractors face for failing to perform.

Just in case – reread the prior paragraph.

Construction bonds can present several drawbacks for owners and contractors. The contractor bonding premium might range from one to two percent of the project price. This cost is passed on to the owner in the form of higher bids. Considering far more than two percent of all building projects have problems, odds are this is a good investment. For contractors, bonds can be difficult to obtain. New contractors might not have the required performance history to qualify and those that do will have limited bonding capacity.

Just in case my point escapes the average reader – if a builder cannot get bonded, it is probably for a good reason.

Bonds are issued by organizations known as surety companies. Once a contractor becomes aware of bid requirements on a job, it is up to him (or her) to contact a surety company to arrange a bond. The surety company will evaluate the contractor as well as the risk associated with the project before determining the bond rate. Once the contractor pays this premium, he is issued a bond certificate, which must be submitted along with the bid. Once the contractor fulfills all obligations associated with the bid or the project, his bond premium is refunded.

Getting bonded can be seen as a hassle for a contractor and it isn’t a freebie for the building owner. However, hiring a bonded contractor can prove to be a life saver if the project “heads south”.