Contractor surety bond: What does it mean for a contractor to be bonded?

Contractor surety bond: What does it mean for a contractor to be bonded?

Next Insurance Staff
By Next Insurance Staff
Nov 24, 2023
1 min read

No matter what you do, owning your own business involves some risk. But when you’re a contractor, your customers are often also taking a risk.

Construction projects are a big expense for most organizations or private property owners. As a contractor, you’ll have to take the usual steps to protect yourself from the inevitable ups and downs of running a business and you’ll also have to find ways to make your customers feel secure. A contractor surety bond helps you accomplish both of those goals.

What Is a Contractor’s Bond?

A contractor surety bond is an agreement between three parties. You, the contractor, pay a fee to have a surety bond provider guarantee your contract with your customer.

This means that if you don’t complete the project, the guarantor will find someone who can or will pay your customer a pre-determined amount. For your customer, this means that when they begin a project, they can be pretty sure it will get finished.

(An important note: NEXT provides customized contractors business insurance and works with a trusted partner to offer contractor license and permit bonds.)

How It Protects Your Business

What a surety bond does for your customer is clear, but what does being bonded mean for a contractor? In some cases, the surety provider will actually help if you find yourself with a cash flow problem mid-project. The regular protection the bond provides for your customer is also an advantage for you. If you’re forced to stop work on a project your customer will, rightfully, be pretty upset and there could be direct or indirect financial consequences to your business. However, if you’ve provided your customer with the resources to finish the work, one way or another, they’ll probably be understanding. You’ll be able to carry on with your business without getting ruined by a single stalled project.

Different Types of Surety Bonds

What does it mean for a contractor to be bonded? This depends on the type of surety bond you need. Each type serves a slightly different purpose:

Bid Bond

A bid bond is a pre-contract bond. Some projects, particularly for government contracts, require you to secure a bid bond in order to even submit a bid. The bond ensures that if you get the contract, you’ll take it on and get other surety bonds as needed.

Contract Performance Bond

A contract performance bond is the most common type of surety bond. It guarantees that you’ll do the work, as outlined in the contract. If you leave the project in the middle, this is the bond that protects your customer and helps them pick up where you left off.

Payment Bond

A payment bond is a way of making sure that subcontractors and suppliers are also protected. If you were to abandon a project after some of the work had been done and supplies had been brought in, your subcontractors and suppliers could demand payment from your customer. If you’ve provided a payment bond, your customer can trust that if something goes wrong, their headache will be minimized.

What About Insurance?

The purposes of surety bonds and contractor insurance overlap but they’re not exactly the same. What does it mean to have insurance? It means there’s an agreement between the contractor and the insurance company that is primarily meant to protect the contractor. You buy a policy once and hold on to it for every job you do. But what does it mean for a contractor to be bonded? It means there’s a three-party agreement that mostly protects the customer. This kind of agreement only covers the particular project you’re working on.

General liability insurance is for accidents or mistakes, whereas surety bonds are for bad contractor behavior. If you something goes wrong and you make an insurance claim, the insurance company pays and that’s the end of it. If something goes wrong and a surety bond is activated, the bond provider will pay and then turn to the contractor to be repaid.

So Which Is It: Contractor Bond Vs Insurance?

Remember, business insurance is for you and contractor surety bonds are for your customers. The advantage of insurance is that it will protect you from the kinds of accidents and mistakes that can happen in the course of your work. Tailored insurance for contractors will give you exactly what you need in a cost-effective way.

Surety bonds, on the other hand, may be required by your customer. There are certain jobs that you can’t get without one and being prepared to offer it shows that you’re willing to put your money where your mouth is. That’s why you may need both insurance and a contractor surety bond. The important thing is to listen to your customers and find out what they need in order to feel that they’re in good hands.

Learn more about contractor license bonds.

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Next Insurance Staff
About the author

NEXT’s mission is to help entrepreneurs thrive.

We’re doing that by building the only technology-led, full-stack provider of small business insurance in the industry, taking on the entire value chain and transforming the customer experience.

We want to make sure you have all of the information you need to make an informed decisions about purchasing business insurance. We hope you’ll find this information helpful.

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