What is Contractor Bond and Why are They Required?

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Contractor license bonds are a special kind of surety bonds that usually involves the co-operation of three different parties in a construction project.  The bond helps the contractor, client, and issuing agency against costly business decisions that jeopardize the success of the job. 

The bond once signed by parties involved is legally binding on the contractor, the agency and the client. If a contractor secures a contractor licensing bond he is reaffirming his commitment to providing ethical and professional business services.  Surety contractor bonds also protect the public because you indicate that you and the business that hired you will not carry out unethical practices that will put them in harm’s way.

Should you need a contractor license bond, contractorbond.org has some of the best professionals skilled in this aspect of legal documentation. 

Also Read: Reasons Why You Should Hire a Professional Contractor For Home Renovations

Types of Construction Bonds

Contractor license bond: As we have explained earlier, they are a type of surety bond that helps the contractor, the agency and the client against unethical business decisions and failures.

what is Contractor Bond

Source: southcoastsurety.com

Bid Bonds: Bid bonds are protective bonds used to insure a client if a contractor fails to sign a contract after winning a bid. Bid bonds are required from the contractor’s prior to submitting bids. Some times when contractors discover they have underbid a project they might decline to sign the contract. This is why it’s important to carry out due diligence before submitting bids for a contract.

Performance bonds: Performance bonds are self-explanatory. Contractors submit performance bonds to reaffirm their commitment to seeing to it that the project is completed according to the agreed terms.  If the contractor defaults on the contractual terms, the agency or hiring client can use the performance bond against the contractor by hiring another contractor to complete the job. 

Payment Bonds: Payment bonds help to establish a payment relationship between the contractor, the hiring company and subcontractors. It is a bond that ensures that everyone involved in a construction project is paid for their services. 

Contractor Bonds – Why are they required?

Now that you are aware of the meaning of contractor bonds and the different types of contrition bonds, let’s have a look at some of the reasons why these bonds are important.

  1. You have to get licensed: This is the 21st century, gone are the days where you could just take up any project without proper documentation or approval. In a civilized society, things are done in order.  There are various prohibition laws and policies that forbid unlicensed contractors from taking up construction projects. Get licensed to avoid the embarrassing arm of the law.
  2. You need it for construction projects: Almost all construction projects carried out in the United States require a contractor license.  Without one, you won’t win projects and hiring companies won’t take the risk of hiring you. 

Each type of bond discussed above has potential problem areas they cover. All issues surrounding biding, licensing and paying workers are covered by bonds.

  1. Contractor bonds protect against uncertainties: Projects can go sour sometimes because of some unforeseen circumstances. Contractor bonds help to protect all parties involved from the uncertainties that are associated with construction projects. Smart contractors plan ahead of time to accommodate the uncertainties of construction projects.
  2. You need a bond for court proceedings: If construction jobs go sideways all the way to the courtroom, you will need the bonds to defend yourself.
  3. Protect the image and brand of your business: With a contractor bond, you place your business in a positive light of credibility. Since these bonds are obtained by looking at the personal credit of contractors, displaying a bond will demonstrate your credibility to hiring companies and agencies.
  4. Clients have the right to know: Any client, homeowner or companies who hire you have the right to know if the contract agreement is properly bonded and documented.  According to some laws in states, contractors are obligated to inform the client or the hiring company about their contractor license bonds.  If you don’t have one, you are immediately seen as an avoidable risk no one is willing to take.
  5. Contractor bonds will help you win more projects: Don’t be left behind the park. Contractor bonds are for the good of all parties involved. The public views these bonds as a necessary requirement and will opt to hire a contractor with a legally binding bond than those without one. Quit acting like these bonds are unnecessary bureaucracies and do what is expected of you as a contractor.   
The 4 Stages of Contractor License Bond

Reputable agencies will be happy to walk you through all that is required to obtain a contractor or surety bond. Here are the general steps to get on

  1. Determine the type of bond: the first step in obtaining a contractor bond is to determine what type of bond you need.  If you want to carry out construction work in sites such as a municipal environment, you will need a contract bond that serves to cover the local requirement of that region. Two bonds can be at play here; in addition to the state’s contractor license bond, you need a local contractor license bond.  Depending on the type and complexity of the project, you may be obliged to obtain multiple sureties as a grantee of ethical conduct.

what is Contractor Bond

Source: angieslist.com

You must find out from a seasoned professional which bonds are required before you begin construction work on any site.

  1. 2. You have to apply for the bonds: The application process is considerably easy in the first step because each state has an online portal where applications are received. These portals can process all types of bonds including tax bonds, bid bonds and a lot more
  2. Submit the completed forms: Once you have received the bonds you requested, it’s time to fill and sign them. Endeavor to make copies before returning the original copies to the appropriate government agency. 
  3. Receiving your license: Once the right government agency receives your application, they will process it and forward it to you the required contractor bond.
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