Within the construction industry bonds are frequently used to help reinforce industry regulations and contractor/client relationships. Many of us outside the construction and bonding issue are at a loss when trying to understand the purpose of construction bondsas well as how they work to benefit each individual in the process. Don’t worry though because this article will shed some light on the different bonds needed when working within the construction industry.
Below, we will offer a detailed look into the four most common surety bonds that construction professionals should familiarize themselves with. The most frequently requested contract bonds that help to regulate the construction industry are as follows:
Contractor license bonds are purchase by a contractor in order for them to become licensed within the state to work within the construction industry as a legitimate business entity. Different states, counties, cities and subdivisions often require their own license bond. Without the necessary paperwork filed contractors will not be able to obtain the proper licenses. If a contractor does not have the proper licenses they will be faced with penalties, fines, legal action and license revocation.
A bid bond is not always necessary but frequently requested when a contractor is submitting a financial proposal on a project to the owner. The project owner may require a contractor to obtain a bid bond before accepting the contract that is being proposed. A bid bond offers a guarantee that the contractor enters into the contract in good faith. This means that the services and materials can all be provided per the terms of the contract.
Payment bonds are required for all jobs over $100,000 under the federal Miller Act. A payment bond helps to ensure that all subcontractors and suppliers of materials get paid for their contributions to the project. This type of bond protects a project owner from assuming these expenses if the contractor fails to pay them. Payment bonds ensure that unpaid parties are paid through the liability of the payment bond. The contractor is ultimately responsible to reimburse the surety company if payment to subcontractors or material suppliers if the payment bond is required.
Performance bonds are often paired with payment bonds as they both offer protection to the owner of the project against any loss because of shortcomings of the contractor. A performance bond ensures that the project is completed as stated it should be in contract. It also states that the project will be performed on time as stated. If the projected is not performed, the owner can make a claim against the bond if unsatisfactory work is performed or the work is not done on time. If the claim is valid the bond is paid by the bond company the contractor has to pay bond.
A bond company tries to only issue surety bonds to those contractors believed to be worthy of upholding their contractual obligations. The process of qualifying for surety bonds can be a difficult process for construction professional. Understanding how surety bonds work and working with a company that specializes in issuing bonds can help for a smoother process overall.
Surety bonds are often associated with insurance. This is understandable for a few reasons. Bonds provide coverage for losses that are incurred and are often sold by insurance agents. The difference however is that with surety bonds they must be noted where as regular insurance does not.
In the article below we will discuss several types of surety bonds that small businesses need. There are about twenty five thousand types of surety bonds available. Below we will discuss the five most common types of bonds that a variety of small businesses should consider having before they begin operating.
Surety Bonds for Construction
Within the construction industry bonds are often required of contractors. A license and permit bond is often required before a license is issued whereas performance bonds are more job specific.
License and permit bonds are required of contractors before a license can be issued. This is to safeguard residents within the state from financial losses. These bonds are often inexpensive based upon the contractor’s credit rating. They can cost anywhere between two hundred and one thousand dollars.
Performance bonds are issued based upon the job. It is issued to cover the performance that is contracted; this can be for a variety of reasons such as having a deadline to follow or a budget to stay within. When a contractor is licensed and bonded it provides a financial confidence to their clients that the project they are contracted to provide will occur as stated within the contract.
Surety Bonds for Cleaning Businesses
When your occupation requires that you enter private property, such as in cleaning and janitorial services, it is important to acquire a janitorial service bond. With the access workers are given to personal belongings it is important to have reassurance that businesses and homeowners are protected from theft.
When a cleaning crew is licensed and bonded they are providing extra assurance. Their clients are protected from the service provider and their employees in case of thievery. These bonds are inexpensive and communicate that your business is one that can be trusted.
Surety Bonds for Notaries
Integrity is important when it comes to notaries and the services that they provide. A notary is a legal authority that authenticates documents. A notary bond is purchased to protect against notaries that choose to act unethically. A notary bond is usually inexpensive often as low as thirty dollars for a four year term and don’t usually provide a concern for those looking to become notaries.
This type of bond is issued based on a set of conditions that must be met in order for the notary to become licensed. These conditions must be met before they are allowed to conduct notary services within a state.
Surety Bonds for Car Dealers
A motor vehicle dealer bond is required in order to provide protection against unethical practices that are committed by car dealers and their employees. This is a relatively inexpensive business expense for most car dealers. A motor vehicle bond prevents customers from being deceived by car dealers. It offers assurance that car dealers will not sell stolen cars or sell a car based on misleading information.
As you can see is that surety bonds are not insurance but more a type of reassurance that the goods and services that are provided to consumers will be provided in good faith. Surety bonds are purchased in order to prove that business is done in good faith. It is an extra guarantee that goods and services are provided as contracted.