Contractors regularly perform work with a high dollar value, and in an effort to provide the customer with monetary assurance that the job will proceed as described, the contractor purchases a surety bond. Different types of bonds protect the client against different types of default. Some states set additional bond requirements for contractors.
Your state may require a statutory license bond for all contractors. The bond amount relates directly to the dollar value of the potential projects the contractor will complete, and he will purchase the bond with a cash deposit. Proof of purchase is required before the state will issue a license to the contractor. This bond is payable to subcontractors and other lien holders should the contractor not fulfill his financial obligations, up to the amount of the bond’s face value. If the contractor takes on a project with a greater dollar value than his bond, a supplemental bond may be purchased.
When you hire a contractor, you expect him to complete the project as according tot he terms of the agreement. However, the contractor may be unable to finish the job, due to a bankruptcy or another problem. If that occurs, a performance bond, purchased solely for your project, will compensate you for any loses you incur, up to the value of the bond. To recover, the loss must be part of the negotiated contract. The contractor purchases a separate performance bond for each project.
Often, a contractor requires a prepayment, in part or whole, for a job not yet completed. A payment made by the client in anticipation of agreed-upon work is always a risk. To offset this risk, the contractor purchases an advance payment bond with a face equal to the payment. If the contractor does not complete the work, the bond insurer will reimburse the customer, up to the face value of the bond.
All bonds fall under the heading of “surety,” because they form a secondary contract between the contractor, the client and the bond issuer. The bond issuer becomes the surety and protects the investment of the client. Because a general bond is more expensive, smaller specialty bonds, purchased as the need arises, are popular solutions. In addition to the more common bonds, the contractor may purchase bid bonds, retention bonds and maintenance bonds to protect the client.
Although bonds ensure that the contractor will abide by the terms of the agreement, they are not insurance policies. In addition to bonds, the contractor should carry liability insurance to protect against damage to the project, supplies or equipment. He should also carry worker’s compensation insurance to protect his employees against injuries suffered on the job.
Verify the contractor’s bonding if you have any questions. She will contact the bond issuer and they will send you a verification certificate directly. Call the bond issuer if you have any questions about your rights under the bond.