If you’re just starting your career as a professional contractor, you may be eager to develop your business plan and secure your first set of projects. But before you can operate legally, you need to understand surety bonds and why they’re so important.
Surety bonds ensure that you’ll maintain high standards of workmanship and guarantee that you’ll satisfy stringent regulatory requirements. As a result, they’re a licensing requirement for contractors in nearly all 50 states.
In this article, we’ll break down the different types of surety bonds and explain how they can help you bid on projects, secure lucrative contracts, and establish strong client relationships. We’ll also explain how you can obtain the surety bonds you need to kickstart your business.
What Are Contractor Surety Bonds?
Surety bonds are a financial tool designed to ensure that contractors operate ethically, fulfill their contractual obligations, and adhere to all relevant laws and regulations.
In the construction industry, there are two categories of surety bonds: commercial and contract:
- Commercial surety bonds, such as contractor license bonds, guarantee your compliance with government regulations and allow you to operate legally.
- Contract surety bonds help you secure contracts with project owners and government agencies. We’ll explore these types of bonds in greater detail below.
Whether commercial or contract, surety bonds involve the following parties:
- Principal: If you are the contractor, then you are considered a surety bond’s principal. By purchasing the bond, you agree to adhere to all of the terms and conditions of your contract, as well as all relevant regulatory requirements.
- Obligee: The obligee is the entity that requires the contractor to get bonded, such as the government regulatory agency that issues their license or the project owner.
- Surety: The surety is the financial institution that issues the bond and guarantees the contractor’s performance, such as a surety company or insurance company.
Types of Contractor Surety Bonds
Now that we’ve covered the basics of surety bonds, let’s jump into the types of surety bonds you may need to purchase while operating your contractor business.
First and foremost, you’ll need to get your contractor license bond and keep it active for the duration of your career. As a licensed contractor, you’re basically ensuring that you’ll:
- Comply with all legal and contractual requirements
- Pay your taxes on time
- Prevent fraud on your projects
- Only do work you’re legally licensed to do
Along with your license bond, you may need to obtain the following types of project-specific contract bonds:
- Bid bonds – If you want to submit proposals for upcoming project opportunities, the project owners may require you to include a bid bond with your submissions. These bonds guarantee that you’re bidding in good faith and will honor your proposal if you’re selected.
- Payment and performance (P&P) bonds – Once you’re chosen for a project, you may need to purchase a payment and performance bond. This bond ensures that you’ll complete the project according to its contract’s terms and adhere to all regulatory requirements. It also guarantees that you’ll pay your subcontractors, suppliers, and laborers on time.
- Maintenance bonds – After a project is complete, it can take time for quality issues to become apparent. That’s why some project owners require you to purchase maintenance bonds. These bonds ensure that you’ll remedy any defects that arise within a specified period after a project’s completion.
- Subdivision bonds – If you take on a project in subdivision development, you may need to purchase a subdivision bond (often called a site improvement bond). This bond guarantees that you’ll complete your work within the contract's timeline. If not, you may need to pay for the municipality’s financial losses.
How Do Contractor Surety Bonds Work?
So far, we’ve mentioned several times that surety bonds “guarantee” contractors’ regulatory compliance and quality of work. So, how does that play out in practice?
As a bonded contractor, damaged parties can file claims against your bond if you fail to satisfy your regulatory and contractual obligations. Once a claim is filed, your surety company will investigate it and compensate the claimant up to the bond limit. After that, you’ll need to reimburse your surety company for the bond payout amount, plus any fees and additional expenses.
Along with these financial repercussions, bond claims can also result in:
- License suspension or revocation
- Fines, penalties, or litigation for non-compliance
- Difficulty obtaining future bonds
- Project delays or cancellations
- Reputational damage
Since surety bonds establish these clear consequences for non-compliance, they offer you a powerful incentive to do excellent work. In turn, they promote trust among subcontractors, project owners, and other stakeholders in the construction industry.
How Do Contractor Surety Bonds Promote Regulatory Compliance?
Surety bonds have been used for over a century to ensure regulatory compliance. Here are three reasons why they’re so effective:
#1 Surety Bonds Establish Contractors’ Financial Accountability
When you purchase a surety bond, the potential consequences of your non-compliance are always top of mind. This clear understanding encourages you to follow proper procedures and maintain high standards of workmanship from the start.
#2 Surety Bonds Deter Non-Compliance and Enhance Public Safety
Construction work has significant implications for public safety. That’s why it’s closely regulated by state government agencies and local municipalities.
For example, many states have stringent material requirements to ensure the structural integrity of their buildings. If you use substandard building materials, you could put people at risk for serious injuries or fatalities.
By deterring this type of non-compliance, surety bonds enhance public safety and foster greater trust in the construction industry.
#3 Surety Bonds Streamline Project Owners’ Due Diligence
You must undergo rigorous evaluations to obtain your surety bonds. For example, your surety company may review your:
- Credit score
- Financial statements
- Contracting experience and equipment
- Past project performance
- References
- Regulatory compliance history
By conducting these thorough evaluations in advance, surety companies streamline the due diligence process for project owners and regulatory agencies.
How to Avoid Claims Against Contractor Surety Bonds
While you may appreciate the necessity of surety bonds, you probably want to avoid bond claims at all costs. You can prevent bond claims, along with their financial, legal, and reputational repercussions, by:
- Clarifying and honoring all of your contractual obligations
- Closely reviewing and adhering to all relevant regulations
- Paying all of your subcontractors, suppliers, vendors, and employees on time
- Paying your taxes and fees on time
- Repairing any damage to public property that occurs during your project
- Refusing to engage in any acts of fraud
As long as you maintain high standards of professionalism and compliance, you should be able to protect yourself from bond claims and ensure the long-term success of your business.
Get Bonded With BOSS Bonds
Do you need to purchase surety bonds for your contractor business? BOSS Bonds has you covered. We offer a wide range of contractor bonds, from bid bonds to maintenance bonds.
Along with matching you with your state’s required bonds, we can offer you competitive rates and expert guidance. Our bond experts are dedicated to your business success.
Ready to get bonded? Reach out to our surety bond experts today.
