Working with Contractors: What are Bonds, and How Do They Work?

If you are hiring, working with, or employing contract workers, it’s important to have construction bonds in place. In fact, many construction projects today require contractors to provide bonds, so this is a topic you should know the ins and outs of in terms of how they work. 

Construction bonds are necessary when contractors are performing work in homes or other businesses or locations, ensuring that projects will be completed on time and that all materials and labor performed are paid for.

What Are Construction Bonds For Contractors?

Surety bonds act like an insurance policy for the agency or owner of the project that is scheduled to be completed with the approved construction materials, within the time allotted and with approved construction methods.

To understand the basics of bonds, think of it as an insurance policy with a few differences. A contractor purchases a bond to protect himself and/or the project owner from potential financial issues that can come up during the project. The cost of the construction bond is based on the contractor's financial health, and propensity to finish past jobs in good standing. 

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Why Are Construction Bonds Important?

As mentioned above, in some cases, construction bonds are required by state or local regulations for large remodels, building large homes, or business contracts. Therefore, they are important because they are required. However, even if they aren’t a regulation requirement, bonds serve an important role by acting as an assurance to the owner that the project will be completed and the terms of their project are fulfilled.

Types of Construction Bonds

The following are several common types and stages of construction bonds and how they differ from each other: 

  • Bid Bonds: This type of bond is vital for contractors who bid on large projects. This bond ensures that the contractor who is bidding on the job has the resources to complete the project to the owner’s standards. In many large residential projects and government projects, a bid bond is required for competitive bidding. At this point in the project process, if a contractor backs out of the project, they don’t move on to the next step. Speaking of which…

  • Performance Bonds: The next step in the project process is the performance bond. This takes place after a contractor has accepted a bid and has agreed to work on said project. These types of bonds protect the agency and the client in the event a contractor doesn’t follow through on the project as promised. The bond would then be utilized to finish the project via hiring another contractor if the first contractor fails to finish the project. In addition, if the contractor uses defective materials or parts, or they don’t live up to their part of the contract, this bond protects the owners. 

  • License Bonds: License bonds can be required by state licensing boards and differs from other bonds. They ensure that a contractor will remain in compliance with state laws and are the obligee of the contractor’s board. The license bonds are set by the licensing agency of each state’s contractor. 

  • Payment Bonds: This type of bond is sometimes necessary and sometimes not required. In most cases, a payment bond will be necessary if the contractor has a history of not paying bills on time. Payment bonds work to protect suppliers from contractors who don’t pay for materials from said suppliers. Payment bonds are necessary to prevent subcontractors or suppliers from coming after an owner if a contractor doesn't pay what they owe to subs and suppliers.

This can seem like a lot, we understand! And when it comes to construction, getting the job done correctly and on time is of utmost importance. The team at Arnold Insurance can help walk you through the bonds process so that you have all the right documentation in place. Contact us today to learn more!


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