What is a Contractor Bond?

A contractor bond is one of the most common types of surety bonds. Hundreds of thousands of Americans either have or need to get one of these bonds, which can fall into many different subcategories we will explore later. With something so important, it’s crucial to understand the ins and outs, know how these surety bonds affect you and your finances, and have a plan to obtain a surety bond if and when you need one. Read on.

Contractor Bond Definition

Contractor bond is actually a broad term that describes a variety of different kinds of surety bonds that contractors and construction companies may need to obtain. Surety bonds like these hold a contractor accountable if he or she doesn’t meet standards for quality, timeliness, cost controls, or others outlined within the work contract. The specifics vary widely depending on the type of surety bond, the state, and the circumstances. However, the fundamental principle of contractor surety bonds is always the same: guaranteeing that a contractor takes financial responsibility after failing to meet expectations.

Types of Contractor Bonds

Most of these surety bonds fall into one of five categories:

Bid Bond – Obligating a contractor to follow the terms of a bid
Payment Bond – Obligating a contractor to pay all subcontractors and material suppliers
Performance Bond – Obligating a contractor to meet specific performance standards
Warranty Bond – Obligating a contractor to honor the terms of a warranty
License Bond – Obligating a contractor to follow state licensure requirements

How Does a Contractor Bond Work?

In the event that a contractor doesn’t follow the terms of the work contract, the party who has been negatively affected by that contractor’s actions may file a claim against the surety bond seeking financial compensation equal to the cost of the damages. In a performance bond agreement, for example, if a contractor agrees to complete a project in 100 days and it takes 120 days, the other party in the surety bond agreement (called the obligee) may seek damages to cover the cost of the delay. The surety company that issues the bond agrees to settle (pay) any valid claims, after which they will seek to collect that same amount (plus interest and fees) from the contractor who holds the surety bond and triggered the claim. A surety company will always guarantee payment, but they will also always hold the bonded party financially responsible.

How does a Contractor Bond Benefit the Obligee?

Contractor surety bonds give the obligee – typically the party that hired the contractor, or the municipality that issued the contractor’s license – a way to seek justice and financial compensation if a contractor doesn’t do what he committed to doing. In addition to making the obligee whole, surety bonds offer a way to hold contractors accountable for improper business practices.

How does a Contractor Bond Benefit the Principal?

The principal – the term for the contractor who is the bonded party – must pay for the bond and for any claims filed against it. Despite the personal cost, however, the principal benefits from this arrangement too. That’s because surety bonds build trust between the obligee and the principal, which translates into more work for contractors. Ultimately, bond agreements are good for all involved.

Who Can Get a Contractor Bond?

Anyone who applies for one, gets approved, and pays the premium. To apply you will need to submit a standard surety bond application. That application will ask for information about your business, background, and finances. You may also need to supply additional documentation to help the surety bond company understand your financial standing and credit risk. The cost of a contractor bond can vary depending on whether or not you are considered a credit risk. Upon being approved, the surety bond company will quote you a price to to issue a bond with a 12-month term, or longer when applicable.

Do You Need to Renew a Contractor Bond?

In some cases yes and in other cases no. With a contractor’s license bond, you will need to have an active surety bond to maintain a valid license, meaning you will have to renew the bond annually. Renewal involves having your credit re-evaluated (which could raise or lower your premium price) and paying the premium again. With something like a performance bond, where the bond is tied to the outcome of a specific project, a contractor won’t need to renew the bond once the project concludes.

Viking Bond Service – A Partner to Contractors Nationwide

Contractor bonds are a hugely important business consideration for contractors, but they’re not the primary focus. From a contractor’s perspective, surety bonds should be affordable, accessible, and easy to manage. That’s why so many contractors work with Viking Bond Service, a nationwide surety agency helping all contractors find the surety bond they require. Complete a bond application at any time to get a no-obligation quote, or contact our team at 1-888-278-7389.

Bid Bonds: How Do They Work?

This is a common question, and an important one. If your business depends on winning bids to perform construction projects, you will likely need a bid bond at some point, and more likely need this particular type of surety bond on a regular basis. Bonding issues make it much harder to compete for bids, so it’s important to understand how this process works from beginning to end. In this post, the team at Viking Bond Service outlines everything you need to know about bid surety bonds.

The Basics of a Bid Bond

Before discussing bid bonds, it helps to understand performance bonds and payment bonds. Typically, contractors and construction companies must obtain these surety bonds before starting work on a project. A performance bond essentially guarantees anyone hiring construction workers that work will be done correctly or else damages will be paid. A payment bond issues damages if a construction company fails to pay subcontractors, laborers, or material suppliers. In order to safeguard themselves from risk and liability, most developers and project owners require anyone they hire to have a performance bond and payment bond.

A bid bond is essentially a way for contractors to prove during the bidding process that they can obtain the required performance and payment bonds if hired to complete the project. It’s comparable to a pre-approval for a loan. In the same way that pre-approval demonstrates to a seller that a prospective buyer can get a large enough mortgage to cover the cost of a home, a bid bond proves to a project owner that a prospective bid winner can later get bonded as the project contract requires. By securing a bond, the prospect proves they’re serious, qualified, and committed.

How does a Bid Bond work?

A Bid bond works in two ways. First, as discussed above, it proves the bond holder can later obtain any other bonds required. Second, bid surety bonds offer the project owner some protection against the risk of choosing the bid of someone who pulls out of the project before starting. If and when this happens, the project owner may file a claim against the bid bond for damages equal to whatever financial losses the contractor caused by abandoning the bid. The surety company that issues the bid bond backs the payment of all claims, but only as an intermediary. When the surety pays for a claim the bond holder must pay that amount back.

Requirements for a Bid Bond

Bid bonds themselves are relatively easy to get, as long as the bond applicant can also later get approved for a performance bond and payment bond. That depends in large part on the bond applicant’s credit score, financial history, and business strength. It also depends on the surety provider the bond applicant works with. Every provider sets their own requirements for who they approve for a bond, and some providers are more forgiving of bad credit or financial blemishes than others. If you’re worried about meeting the requirements for a bid surety bond, work with the team at Viking Bond Service. We specialize in getting more applicants approved for the bond they need regardless of credit.

How much does a Bid Bond Cost?

A bid bond doesn’t cost much on it’s own. However, by taking out a bid bond, the bond holder also commits to securing a performance and payment bond as well, which cost significantly more than bid bonds. You won’t need to pay everything upfront, but you will need to account for these costs as part of the project budget.

How to Avoid Bid Bond Claims

Bid bonds cost relatively little unless they result in claims, in which case they can cost the bond holder a lot. Fortunately, avoiding claims with bid bonds is simple compared to some other kinds of surety bonds, including performance and payment bonds. You simply need to commit to following through with any bid you win. In practice, that means only submitting bids (and obtaining bid bonds) for projects you have the resources to complete. Follow that rule, and the risk of claims is extremely low.

How to apply for a Bid Bond?

The application process varies for bids above and below $250,000. Below that amount, you will need to provide a standard bond application along with information about the bid, your business, and your bonding history. You will also need to submit to a credit check. Bids above that amount will require additional documentation to help the surety understand your credit risk.

Viking Bond Service – A Nationwide Authority on Bid Bonds

You shouldn’t underestimate the importance of bid bonds, but you shouldn’t stress about getting one either. With the right surety provider, bonding can be a quick, easy, and economical process – one that you use to win more bids on a consistent basis. Rely on Viking Bond Service, a leading surety bond company for everything you need, from service and support to the bonds themselves. Meet our team and ask any questions you may have by calling us at 1-888-278-7389. You can also make contact through the form on this page. Or, if a bid deadline is looming, get the process started by submitting your online application today.

7 Things You Need To Know About Construction Bonds

Construction bonds are a fact of life for many in the construction industry. That’s why it’s essential to understand how these contract surety bonds work, how they affect the parties involved, and what bonding means from a business perspective. This article covers seven things you need to know about construction bonds.

1 – What is a Construction Bond?

Construction bonds, also often referred to as contract bonds, are a category of surety bonds, used to ensure that a construction project is completed successfully according to all terms, conditions, specifications, and budget. These bonds hold a contractor or construction company, (also known as the principal), financially accountable if they fail to meet their contractual obligation. For example, if any work was not performed according to specifications, and the contractor is either unwilling or unable to correct the work, the project owner, (also known as the obligee), could use the construction bond to access funding to hire a new contractor to correct the work.

2 – How does a Construction Bond work?

When the outcome of a construction project fails to meet all terms, conditions, and specifications, the project owner may have a right to file a claim against the construction bond. The surety company that issued the bond will conduct an investigation into the claim. If it is a valid claim the surety will first see if the issue can be resolved through mediation, as this is can often be the fastest way to achieve resolution. However, if mediation is not possible the surety will quickly make financial compensation to the project owner so the project can continue with as little interruption possible.

A surety assumes a risk when bonding a contract. They guarantee a financial recourse is available to a project owner when a contractor fails, and the surety makes payment directly to the project owner themselves, instead of the project owner having to try and collect the funding from the contractor. The surety is then left to the task of collecting repayment for the claim from the contractor.

3 – How Do Construction Bonds Help with Managing Risk?

Having any substantial construction project completed involves risk. One way to manage that risk is by holding the contractor legally and financially responsible for any failures by requiring they bond the contract prior to construction beginning. If the contractor fails, the surety will step-in and assume the cost to correct the failure when the contractor refuses or is unable to correct the failure themselves.

4 – What are the Main Types of Construction Bonds

The term construction bond actually applies to three types of surety bonds, each related to a different kind of risk. They go by one name simply because construction companies often need all three of these bonds and rely on one surety provider to make bonding seamless:

Bid Bond – These bonds hold the principal accountable for withdrawing from a project they have won a bid to complete.
Performance Bond – These bonds hold the principal accountable if a project fails to meet performance standards established by the project owner.
Payment Bond – These bonds hold the principal accountable if that party withholds payment to subcontractors, laborers, or suppliers for invalid reasons.

Types of Construction Bonds Explained [Infographic]

5 – How Much Does a Construction Bond Cost?

There are a variety of factors used to determine how much it will cost to bond a contract, including but not limited to; the dollar amount of the contract, the type of work being performed, the experience of the contractor, the contractors credit and financial strength, as well as the relationship between a contractor and their surety. The cost of a bond is referred to as the rate, and it is expressed as a percentage of the total contract value.

Example: If a surety approves bonding a $50,000.00 contract with a rate of 2.5%, then 2.5% x $50,000.00 = $1,250.00 (the cost to bond is $1,250.00)

Generally speaking, smaller contracts up to about $500,000.00 will have a rate of between 2% – 4%. Mid-sized contract up to about $2,000,000.00 will have a rate 1.75% – 2.5%. Large contracts over $2,000,000.00 are often as 1%, and not typically higher than 2.%. Again, it is important to recognize the various factors that impact a contractor’s bond rate when trying to get the lowest rate possible.

One of the most important things a contractor can do to ensure they are getting the best rate possible, is to work with a reputable surety agency to develop a relationship. A reputable surety like Viking Bond Service will help a contractor grow and improve their bonding qualifications, which will help result in the contractor getting a better rate.

6 – What Projects Require a Construction Bond?

Construction bonds are commonly required on most public works contracts by cities, counties, and states, as well as federal contracts. However, any commercial project could potentially require a construction bond if the project owner determines that one should be required.

7 – How Bad Credit Could Prevent You from Getting a Construction Bond

The way a bond works where the surety pays a claim then has to seek repayment from the contractor, makes a bond an extension of credit just like any other extension of credit with the one notable exception that a contract does not ever want to have to utilize their bond.

Since contract bonds are a form of credit, if an applicant has bad personal or business credit, getting bonded can be challenging as credit rating is often used to determine risk. An applicant with credit concerns is statistically more likely to cause a claim against a bond, and less likely to pay the surety back for the claim.

The good news is there are sureties willing to work with applicants that have credit concerns. They specialize in assisting these contractors in getting bonded, so they can obtain contracts and continue generating income. If you have bad credit or have been denied a bond elsewhere, rely on Viking Bond Service to do everything possible to get you approved. We even have a special bad credit surety bond program designed specifically to approve more applicants for more bonds.

Viking Bond Service – Building America One Bond at a Time

When you require a construction bond in any amount in any state, work with Viking Bond Service. As a nationwide surety bond company that operates in all 50 states, makes service a top priority, and has abundant resources to offer, we do what other surety bond providers can’t or won’t. If you have questions about any aspect of construction bonds or simply want to talk through the details with a friendly expert, call us at 1-888-278-7389 or use the form on this page. You can also request a free bond quote at any time with no obligation to you.