In short, contract surety bonds are agreements where the contractor, or sub-contractor, guarantees fulfillment of an obligation to a purchaser. If the obligation is not met, the purchaser can make a claim against the contractor and be refunded all, or a portion, of their losses.
Once you, as a contractor, have made the decision to purchase contract surety bonds, you can use those bonds to promote your business. Construction bonds can act as a marketing tool in three important ways:
- It shows your business complies with government regulations
- It gives clients a way to collect if you don’t do your job
- It keeps unqualified contractors from working in the industry
It is all too common for contractors to purchase a surety bond because they have seen others do it, or know they have to, but rarely do they understand exactly what they are getting for their money. A clear understanding of the contract bond is important in order to ensure you have the right protection.
As a contractor bidding on a job, a bid bond guarantees the owner that you will sign a contract to do the work at the price of your bid, if your bid is selected. Your bond also ensures that you will be able to provide any other bonding the job might require later on. If you withdraw, the bond will require you to pay the owner the difference between your bid and the next lowest bid. (This sum is usually limited to no more than 10% of the tender.) Essentially, a bid bond is proof or your good faith to agree to a contract for a job.
Getting the job is only the first step toward getting the job done well. A performance bond guarantees your client that you will complete the work according to the contract. If there’s a default, the bond will provide your client relief after a loss adjuster has investigated the claim.
Labour and Materials Bonds
A labour and materials bond is usually issued at the same time as a performance bond. It ensures that suppliers and subcontractors used on the job will be paid according to the contracts they agreed to with the contractor (the principal). Businesses that possess labour and materials bonds can often negotiate better prices on materials, because suppliers have a guarantee that they will be paid.