How Difficult is it to Get a Contractor Bond

A contractor bond (also known as construction or surety bond) is a bond that must be paid by the contractor before the undertaking of a construction project to the project owners or investors in the case of contractor default, incompletion or failure to meet specification requirements.

Who’s involved in contractor bonds?

There are generally three parties involved in contractor bonds: the project investors (known as obligees), contractors who will complete the project and the surety company that ‘administers’ the bond.

The obligee is usually a government or public organization that hires a contractor to carry out large scale construction projections. Contractor bonds are put in place to hold the contractors liable so that they complete the project on time.  Here is a closer look at contractor bonds.

The difficulty in getting a contractor bond starts when the contractor must purchase a bond from a surety company. The surety company runs extensive background checks on a contractor’s financial history before the bond can be approved. A surety company acts as a financial guarantor for the bond, reassuring the oblige that the contractor will meet the terms of the agreement of the bond.

If a contractor files for bankruptcy, for example, the surety company will be responsible for compensating for the obligee’s financial losses.

Why is securing a contractor bond difficult?

The surety company will calculate a premium based on a contractor’s performance and financial history, and how likely they are to default on the project. So, if you have good performance and financial records, the premiums charged will likely be lower. Just like loans, this method is more beneficial for larger and more established contractors. For new contractors who don’t have an extensive project history, the premiums could be more costly and probably more paperwork will be involved.

However, once approved, surety bonds could add to the credibility of contractors as being reliable and trustworthy.

For larger projects, there are three types of contractor bonds:

  • Bid Bonds- Contractors pay this during bidding to reduce the risk of them backing out of the project
  • Performance Bonds – This bond protects the obligee if the contractor fails to meet the specification and quality requirements of the project.
  • Payment Bonds- These are paid by the contractor to reassure that they have the financial resources available to pay for workers and materials.

Safety nets

As the case in most insurance markets, new and small contractors may find it difficult or even impossible to secure a bond for the first time.

An option for new or small contractors might be safety programs like the SBA’s Surety Bond Guarantee Program. They assure up to a 90 percent guarantee to the surety. The program is suitable for any small business meeting the SBA’s eligibility criteria. $ 6.5 million worth of single bonds are offered by this scheme.

An Uninsured Contractor is a Recipe for Disaster

Construction sites are one of the most dangerous places and workers are most prone to accidents. Hence it is required by law that the contractor must be insured, this helps in covering the damages both to people and places.  If something happens on a construction site then there is ample coverage for any injured worker or damaged property can be compensated.  Having an uninsured contractor opens you up to liability.

Let us see how an uninsured contractor is a recipe for disaster

If a contractor doesn’t have at least the minimum amount of insurance, they are allowed to be licensed either and basically you have unlicensed and uninsured people are working on your site.

Remember for licensed, insured contractors, the general contractor holds a general insurance policy that has good coverage but if your contractor is unlicensed and uninsured you become the general contractor which means you must be paying for the medical expenses and no insurance will come to your rescue if something happens on your property.  Therefore, you the owner of the property are responsible for anything that goes wrong with the uninsured contractor.

Your Home Insurance Policy

You might think that homeowner’s insurance policy might come to your rescue but that isn’t the case. Any medical or any damage caused to the unlicensed, uninsured worker are purely excluded from the policy coverage, so is any damage to your property.  In case of uninsured and unlicensed contractor anything happens then you the project owner is held liable and they can even sue you for that.  So not only can they cause damage to your property but they can sue you on top of that.

Don’t Let a Low Price Fool You

You may be wondering why anyone would ever deal with an uninsured contractor and open themselves up to that kind of liability.  Most homeowners do it to save money.  These types of contractors tend to charge a significantly lower price.  Aside from the risks you are taking the quality of the work isn’t usually as good either.

Going with an uninsured contractor is a case of being “pennywise, but pound foolish” where in the long run you will end up spending far more than if you had hired a reputable contractor to begin with.  If something goes wrong on your property it can bankrupt you.  Always check to make sure that your contractor is insured and ask for proof.

Understand that an uninsured contractor is a recipe for disaster