Bonds for Contractors
Business transactions are fueled by the presence of contracts. Without the legal stipulations that contracts outline, it would be difficult for businesses and their customers to engage in meaningful transactions and to give/deliver services. Contracts are normally backed by the issuing of surety bonds. Surety bonds protect the recipient of a service from incurring damages as a result of a negligent service provider. [Contact NFP Surety for all you contractor bond insurance needs. If you need a contractors license bond, contact our office. Apply to be a bonded contractor in just a minute.].
One of the most common surety bonds that are issued are contractor bonds. Bonds for contractors are issued by licensed contractors, construction companies, and businesses that hire employees to provide services on their behalf. The primary purpose of these bonds is:
- To ensure that licensed businesses adhere to the required state and federal laws.
- To protect customers from incurring damages from negligent businesses
- To provide an extension of credit to service providers in case they violate a contract with a customer.
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General Contractor Bonding
Contractor bonds are a type of sureties that is issued to persons or businesses that provide services based on an agreed contract. The basis of the surety bond is to guarantee customers that the business will fulfill the terms of the contract as agreed upon. In the event that a business offering a service violates the contract, then they will be liable for any damages incurred by the customer.
There are 3 main parties that are involved in a contractor bond. The principal (service provider), the obligee (service recipient), and the surety (the insurance company that provides a bond). When the principal agrees to provide services to the obligee, the obligee will often require some assurance from the principal that the service will be provided to the standards agreed upon in the contract.
A bonded contractor will therefore issue a surety bond to the obligee, pledging that if they violate the contract, they will compensate the obligee for any damages. The surety is the insurance company that issues a bond to the principal, and agrees to honor any valid claims made by the obligee. As you can see, general contractor bonding is vital to getting hired to perform a job.
Types of Contractor Bonds
There are 3 main classes of bonds for contractors:
- Construction bonds
Construction bonds are surety bonds that are issued for public construction projects. When the state or federal government requires the services of a construction company for a public project, they often request a surety bond from the company as a guarantee for their services. The primary purpose of the bonds for contractors is to protect public funds from being embezzled by a negligent contractor. When a construction company is hired to carry out a public project, they will issue a surety to state/federal governments, which guarantees that if they violate the contract, a state can make a claim against the bond. In this way, the public project has some level of insurance against suffering financial damages.
In some cases, the actions of negligent contractors can lead to costly financial damages on the part of the project owner. For example, a construction company may fail to perform their duties to the expected quality standards, or they may fail to compensate their subcontractors. In addition, they may also cause damages to the property of the obligee. In such cases, the construction surety bond can protect the obligee from the damages they are likely to suffer as a result of these activities.
The federal government therefore requires that any construction project that will cost $150,000 or more to be carried out by a bonded contractor.
- Contractor license bond
Contractors license bonds are a type of bond that are issued to licensed contractors. Many different businesses are required to obtain a license from the bond state in order to operate. These include plumbers, insurance brokers, electricians, vehicle dealers, and many other service providers. Any type of business that is licensed by the bond state is required to obtain a contractors license bond. This bond protects customers as well as the state from any damages caused by the licensee (the principal).
Customers can therefore seek the services of contractors within the state knowing that they have a level of protection against negligence on the part of the bonded contractor. By customers exclusively seeking the services of a bonded contractor, they can be compensated for any damages they incur by making a claim against the bond.
Another purpose of a bond is to ensure that the licensee conducts their business in accordance with state regulations. There are normally various codes that govern multiple industries. Licensees are required to adhere to these codes as they operate their businesses. Any code violations such as committing fraud, not following state guidelines and defrauding the state can lead to financial damages for customers or state. With a contractors license bond, the bond state or other affected parties can make a claim on the surety bond to be compensated by the surety for damages. If you are in California, check out our dedicated California contractor license bond page! Contact us, now to learn how easy it is to become a bonded contractor.
- Fidelity bonds
The third type of contractor bond issued to businesses is a fidelity bond. Fidelity bonds protect businesses (principals) from damages that are caused by their employees. Licensed businesses that hire employees to provide services to customers are liable for any misconduct committed by their employees. In some cases, employees can engage in theft, dishonesty, or they may perform a job that is below the standards of the contract. These protect the bonded contractor in many cases.
Customers who are aggrieved by the employees of a company can make a claim against the fidelity bond for compensation. The surety will then process the claim and honor it on behalf of the principal. Fidelity bonds therefore act as a form of contractor bond insurance. They protect the business from the actions of negligent employees while providing assurance to customers for the services offered. We have been the leader in general contractor bonding since 1984! Call us with any questions you have about general contractor bonding, and let us show you how to get bonded, and we will lay out all the contractor bond insurance costs. Become a bonded contractor today.
NFP Surety only writes bonds with top-notch carriers that specialize in general contractor bonding. A few of the companies we represent include, but are not limited to Allied, Nationwide, The Hartford, Travelers, Liberty Mutual, Western National, Chubb, Hudson, Zurich, and more. If you have a contractors license bond, you might be already with one of them!
Why are contractor bonds important?
General Contractor bonding is extremely important. Construction companies, licensed contractors, and businesses that rely on employees to provide their services all benefit from contractor bonds. These bonds provide an extension of credit to the business in the event that they cause damages to a customer or to the bond state. Claims made on the contractors license bond can be honored by the surety company, after which the business will reimburse them at a later date.
Most bonds for contractors are also issued at a fraction of the cost of the bond’s face value. In fact, contractor bonds are typically issued at 1-15% of the face value of the bond. For example, a plumber who I required to issue a $1000 surety by the state can obtain it for as low as $100.
Principals that issue contractor bonds also portray a level of professionalism, responsibility, and commitment towards their services.
Contractor bonds are also beneficial to customers seeking the services of licensed businesses. They can enjoy a level of protection against accidents, negligence, theft or the misconduct of service providers as well as their employees.
Working with reputable contractors bonding and insurance company are a vital part of properly bonding your operation. NFP Surety only works with highly-rated contractors bond companies. Call us today, and let us teach you how to get bonds for contractors. We are here to answer all your contractor bond insurance questions you may have. If you are a bonded contractor, or need to become a bonded contractor, you need to call us! We have the knowledge and access to incredible and reputable contractors bonding and insurance company to assist you in becoming a bonded contractor. Don’t let another day go by without requesting a free contractors license bond quote.
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