Surety Bonds Guarantee Contractor Performance

Contractors come in many shapes and sizes, so to speak. Depending on what kind of work they do, contractors also need a variety of business insurance policies including general liability protection and others. Contractors also need contractors bonds, or surety bonds, in order to find, secure and perform work on behalf of their clients.

Contractors bonds in general are a way for contractors to guarantee performance. Each bond is unique and tailored to a specific project; they are essentially an insurance policy between a contractor, the client and the surety bond company. They work as follows:

1)      The project owner, or obligee, seeks a contractor, or principal, to perform certain work under a contract.

2)      The contractor seeks a surety bond from a surety company.

3)      The bond company covers the contractor’s promise to complete the terms of the contract and ensures completion of the contract if the contractor defaults on its obligations to the client.

4)      The surety company must find another contractor to complete the contract or reimburse the obligee for any financial loss if the original contractor fails to meet its obligations under the contract.

Different from a traditional insurance policy, the surety bond doesn’t just reimburse the project owner for damages or financial losses. Instead, the contractor must repay the surety company for any claims it must pay out, meaning that the surety company is also protected from losing money. The surety bond thus protects the project owner and the general public—not the contractor—from the contractor’s potential failure to complete work as promised. Surety bonds ensure that construction professionals abide by the project owner’s specifications and that the work is completed as promised. If the contractor fails to meet its obligations, the project owner is compensated for the financial loss, and another contractor is brought in to finish or correct the job.

Project owners usually require certain types of surety bonds in order to accept a contractor’s bid. There are several types of surety bonds, and each type guarantees a different part of the bidding process and the contract itself. The different types of contractors bonds are as follows.

  • Bid bonds assure the project owner that the contractor can obtain a performance bond should the bid be accepted.
  • Performance bonds, or completion bonds, promise that the contractor will perform the job as agreed upon in accordance with the terms and conditions of the contract.
  • Payment bonds promise that the job will be completed free of all liens. These can be obtained individually or together with a performance bond.
  • License and permit bonds are often required by state, municipal or federal ordinance as a condition for engaging in a particular business or exercising a certain privilege. Examples include performance bonds, payment bonds, customs bonds, tax bonds and warehouse bonds.
  • Maintenance bonds are typically for large projects and promise that the job will be completed free of defects for a specified period of time.

Most federal construction contracts of $150,000 or more require contractors to obtain surety bonds. State and municipal governments and many private project owners also have similar requirements.

The experienced business insurance professionals at Financial Assurance can help you understand contractors bonds and find the right bonds for your specific needs. We can help you with all of your business insurance needs, as well. Contact us today to learn more.