Contractor bonds protect the customers from a contractor not completing the job, it offers the client the security that they will be paid if the contractor defaults. For the most part bonds are classified into two different categories, conditional or demand. Conditional bonds are common and they serve as proof there will be no resulting loss. Contactor bonds off the financial assurance that the bills are going to get paid. The insurance companies or bank that issues the bond will give the customer their guarantee that the commitment of the contractor will hold up. Construction bonds shield the owner against poor work as well. There are actually three types of construction bonds, payment, performance, and bid bonds. Let’s have a look at them.
- Bid bonds
The purpose of this type of bond is to protect the client if the contractor doesn’t honor the bid. Cost overruns have been a huge problem in the construction industry and the bid bond helps to rein in that type of fraud. Under this type of bond the client has the right to take legal actions against the contractor if the contractor fails to honor the bid. If there are cost overruns then the insurance company or bank is responsible for them. That can include having to hire a replacement contractor should it be needed.
- Performance bonds
This type of bonds gives you a guarantee that the contractor will be responsible for the completion of the project as outlined in the contract. The bond is held in place until the project is deemed as complete. If the contractor cannot finish the job, then the bond holder has to hire a new contractor to get the project finished. It is also their responsibility for any financial costs because the contractor didn’t complete the job.
- Payment bonds
Payment bonds are put in place to make sure that everyone associated with the job gets paid. This will include any sub-contractor, suppliers and staff. These bonds will be asked for if you ever decide to bid on any government contracts and you will need to have them in place when you submit your bid.
If you are new to the construction industry with little or no experience under your belt you may struggle to get a contractor bond. You need to demonstrate that you have the right skills, resources and the ability to get the construction project done. The insurance company will want to look at your financial records before issuing the bond, these records will include bank statements and credit history.