Contractor Bonds Explained

contractor bondUnscrupulous contractors have given more than their fair share of headaches. Besides not performing work up to local and state building standards, some dishonest contractors have even abandoned a job in mid-project, leaving some homeowners with a pile of bills to pay suppliers and subcontractors, all the while still wondering how they will ever complete their half-finished building project. To protect consumers against problems associated with deceitful building practices, a contractor bond is issued to safeguard the client against any problems caused by the builder.

A contractor bond is basically financial assurance that a contractor will complete the job to the satisfaction of the client, the building department and the subcontractors/suppliers that work with the contractor. If the contractor fails to complete the job as required by the contract, then the company that issued the bond will be required to pay out appropriate compensation.

Why is a Contractors Bond Important?

More often than not, your contractor will likely do a good job and complete the project according to the building code, the financial lending institutions and your specifications. However, if a contractor does not pay for materials or labor in a timely fashion, homeowners may find that their structure has incurred a lien against the property and structure. While a bond is specifically designed to protect a homeowner from paying for subcontractors or suppliers who were not paid by the contractor, they are also useful for protecting the client from damages to the property/structure during construction as well as lost or stolen materials from the jobsite.

For most contractors around the world, a bond is required to obtain and maintain a current builder’s license. The contractor is responsible for keeping the policy current, paying premiums and ensuring a bond is active for each project.

A contractors bond is purchased by the contractor through a surety company. Depending upon the builder’s credit history, work history and amount of the required bond, contractors can pay a varying amount for premiums associated with the surety bond.

Although it may seem like a contractors bond is only useful to the client, it is also very useful to the contractor as well. A bonded contractor ensures clients that they will be protected against financial problems in the event that the job runs into troubles. Many clients prefer contractors who hold a bond, but it’s also suppliers and subcontractors who are also protected against financial disarray should the contractor fail to complete the job and many suppliers require a contractor possess a bond before services or materials will be sold on credit.

A contractor bond may not be required for all building projects in every state. However, all federal construction jobs require that the contractor have an active bond throughout the project. If you’re unsure of whether or not your builder has a contractors bond in place, you can verify the bond numbers and certification with your local building department to prove the bond is active. This information is particularly useful to the client in the event that a claim against the bond needs to be made.

Making a Claim

Homeowners who find themselves in a compromising position with the contractor can take up a claim against the bond with the surety. In the event that a contractor fails to fulfill the terms of the bond, a homeowner is required to provide proof that in fact the contractor did not complete the requirements of the bond. This may include unpaid bills, damages filled by the insurance company or even police reports. In the event that a contractor leaves the job, an independent party is required to verify that progress on the job has come to a standstill and the contractor has refused multiple attempts to make contact with the client and surety.

Unlike an insurance claim, a claim against a bond falls back to the contractor to make payments to the surety. Because a surety will not absorb the loss like an insurance company, an indemnification clause is often underwritten into the bond contract so that financial responsibility falls back to the contractor and the surety will not lose money in the process. This opens the legal door for the surety to take legal action against the contractor in the event of a bond claim.

Bonds vs. Insurance

When many contractors advertise, they often say they are both bonded and insured. While both are a necessity to protect the client against problems associated with the building project, insurance acts as protection against accidental damages, workers compensation and other builder’s risk that typically affects the contractor more than the client.

A bond acts to protect the client against reimbursement actions from another company that might not have had a face-to-face relationship with the homeowner themselves. In the event that a subcontractor or supplier is not paid on time or the full amount, they will send a notice to owner that claims the owner of the property is responsible for the overdue bills. If the owner does not pay the late bills on time, a lien can be placed on the property. If the bill remains unpaid, legal action can be taken against the homeowner and the property foreclosed upon.

No matter whom you hire for your next construction project, be sure to verify they are licensed, insured and bonded to protect you and your property from unscrupulous contractors.

Photos by USACE Europe District,