Contractor Bonds

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What Is a Contractor Bond?

A contractor bond, also known as a contract bond, guarantees that a contractor will fulfill the terms of their contract. If the contractor doesn’t complete the work or meet the agreed standards, the bond can be used to compensate the project owner.

State or local governments typically require surety bonds for public projects over $100,000 and are sometimes requested for private projects. It protects clients and project stakeholders from any risks or losses caused by incomplete or subpar work.

How Does a Contract Bond Work?

When a contractor fails to fulfill a contract, the bond protects the project owner. Here’s how it works:

The project owner files a claim explaining how the contractor didn’t meet their obligations.
The bond company investigates the claim to determine its validity and confirms the contractor’s failure.
If the claim is approved, the bond company pays the project owner for the losses up to the bond’s limit.
The bonded contractor repays the bond for the amount they covered.

This process makes sure the project owner is protected from losses caused by the contractor’s failure to deliver as promised.

Types of Contract Bonds

Contractor bonds come in different types, each designed to protect the project owner for various types of contractor activities:

Bidding: Makes sure the contractor sticks to their bid if they win the project. It prevents them from backing out after being selected.
Performance: Guarantees the contractor will complete the job as agreed. If they don’t, the bond helps cover the cost of finishing the work.
Payments: Protects workers and suppliers by ensuring the contractor pays them for materials and labor.
Maintenance: Covers the cost of any repairs needed after the project is finished, usually for a set period.
Suppliers: Guarantees the contractor will provide the necessary materials to complete the job as promised.
Service contracts: Ensures the contractor completes services like maintenance or repairs as agreed.
Subdivision/site improvement: Ensure contractors complete site work like building roads or setting up utilities in land development projects.

What Does a Contractor Bond Cover?

If the contractor doesn’t follow through with their obligations, the bond helps cover the costs of getting the job done right.

If a contractor fails to finish the project on time or delivers subpar work

The bond helps hire another contractor to complete the job and fix the issues.

If a contractor fails to pay workers or suppliers for their labor and materials

The bond can cover those unpaid costs, preventing delays or legal issues.

If a contractor’s work isn’t up to code

The bond can help pay for repairs or corrections to ensure the project meets all required standards.

If a general contractor requires subcontractors to be bonded

The bond ensures subcontractors meet their contractual obligations.

Who Needs Contractor Bond Insurance?

Contractor bond insurance is needed by anyone involved in construction or related work, including:

General contractors
Subcontractors
Specialty contractors
Construction companies
Landscapers

Home improvement contractors
Trade contractors
Supply companies
Government contractors
New or small contractors

How Much Does a Contractor Bond Cost?

The cost of a contractor bond typically ranges from 1% to 15% of the bond amount, depending on several factors:

Bond amount: Higher bond amounts mean higher premiums.
Bond type: The type of bond and the associated risks will influence the price, meaning bonds that cover higher risks will cost more.
Project size and scope: Larger projects, especially public ones, may require higher bond amounts, which can increase the cost.
Contractor’s history: Contractors with a proven track record of completing jobs successfully may pay lower premiums than those with limited experience or a history of claims.

How to Get a Contractor Bond

Getting bonded with Insurance Canopy is quick and simple:

Choose your bond value
Make your payment
Get your confirmation

Questions About Contractor Bonds

Why do contractors need to be bonded?

Contractors need to be bonded to show they can be trusted to complete the job as promised.

For public projects: The Miller Act requires contractors on federal projects over $150,000 to have performance and payment bonds. These bonds protect the government and subcontractors, ensuring the work is completed and everyone gets paid. Many state and local governments have similar bonding requirements.

For private projects: Even if not legally mandated, bonds help contractors build trust with clients and project stakeholders. For example, a bathroom remodel contractor might advertise their bond to reassure homeowners that their project is protected. This can help contractors win more jobs and stand out from the competition.

Are contractor bonds required in every state?

No, contractor bonds aren’t required in every state. However, many states require them for public projects or large contracts. Private projects may also need a bond, depending on the agreement.

Can a bond be used for multiple projects or clients?

Some bonds, like a blanket bond, can cover multiple projects or clients. However, most contractor bonds are project-specific and are tied to a single job or contract. Contractors may need a new bond for each new project or client, especially for larger contracts.

What’s the difference between a contract bond and a performance bond?

A contract bond ensures a contractor will fulfill their agreement. A performance bond, which is a type of contractor bond, specifically guarantees the contractor will finish the work according to the contract terms.

What information is needed to qualify for a contract bond?

To qualify, contractors usually need to provide their business details, financial history, and work experience. This helps the bond company decide if the contractor is reliable.

What’s the difference between a contract bond and a payment bond?

A contract bond is a general term for bonds required to guarantee the completion of a contract. On the other hand, a payment bond specifically guarantees that the contractor will pay their subcontractors, suppliers, and workers for their labor and materials. A payment bond is also a type of contractor bond, however, this ensures the project will not be delayed due to unpaid bills.