Contractor Bonds

Why Does California and Other State Require Construction Bonds

The title sounds like it deserves a punchline, doesn’t it? On a serious note, why does California and other states require construction bonds? The idea seems a bit extreme. It is almost as if you are expecting someone to mess up in some form or another. (Nice to know there’s trust between client and contractor). Well, get yourself a nice drink of whatever and settle down to learn why this is the case. Sure it may not seem fair to the contractors or the clients to the contractors, but their job is to make the project work. That’s just business.

What is a construction bond?

From my quick check, the construction bond is a guarantee between a group of three parties and states responsibilities of each party should the project go awry. (On a side note, in construction this happens a lot). This is designed to benefit the investors from harmful financial issues.  Here is a brief overview of the different types.

What do they cover?

As they are tailored around the performance of a construction project, this will cover three main points:
• Event that causes a disruption
• Unable to reach specification
• Bankruptcy of builders

Let’s go through each one in a bit more depth.

Event that causes a disruption

This will typically be between the contractors and the client without the input of the investor. (After all, all the investor is interested in is the financial reward). If the client, contractor start to become hostile and unresponsive to each other and this comprises the schedule of the project it’s not the investors fault. So, they shouldn’t be expected to be responsible for this and, as a result, there’s no need for them to pay. Seems reasonable.

Unable to reach specification

Why should the investor pay if the job isn’t right? If it’s not what they asked for, why are you expecting them to pay? That is just illogical. They asked for something, you messed up, you clean up.

Bankruptcy of Builders

From my experience, being bankrupt shows you might not be the most able person financially and therefore the investor shouldn’t be relied up to be bail the contractors out. Consequently, they are protected and hold no legal responsibility if such event should occur during the project.

To wrap It all Up

That is a whistle stop tour about my California and other states have a construction bond. The bottom line is the investors don’t want to clear up the mess of everyone else. In all fairness this seems reasonable and hence by the bond is in place.

Contractor Bonds

A Contractor Bond is an Investment in Your Business

All businesses need surety and assurance nowadays since it will help protect you as the owner and your business. The thing that will help keep your business safe is by investing in a contractor bond so you can easily evaluate and manage all the risk of your construction projects.  A contractor bond is an investment in your business and not an expense.

How Does A Contract Bond Work?

The project owner seeks your services as a contractor. You will have to meet their requirements to fulfill the contract. But before starting the job, you should first get a surety or contractor bond from a surety company, in fact a contractor bond may be a requirement to bid. The contractor bond enables you to enter into the contract safely and protect your business.

A contractor bond helps screen out unqualified contractors, which makes it a good investment in your business. However, it is not easy to obtain a contractor bond since you have to undergo a prequalification process to determine if you are capable of fulfilling the given contract.

What Are The Contractor’s Obligations?

You, as the contractor, are backed up by the surety company. The deal includes your performance according to the terms and conditions of the contract. It is also your duty to pay your subcontractors, laborers, and suppliers.

Types of Contractor Bonds

The first is the Bid Bond. The benefit of the Bid Bond is that you are guaranteed to enter the contract with the owner and perform as required and furnish the payment bond.

The second is the Payment Bond. This type of contractor bond ensures that all subcontractors, laborers, and suppliers are paid for all the labor and materials supplied to you and used for the project.

The third is the Performance Bond. Signing the performance bond guarantees that you will follow all the terms and conditions written in the contract with the owner.

The fourth and last is the Maintenance Bond. This contractor bond covers some period, usually a year, after finishing the job. Maintenance Bond ensures that no defective material or workmanship will appear during this period.

Work With A Reliable Surety Company

A contractor bond can be a little costly depending on the amount of the construction project. But it is a good investment to help protect your business and increase your likelihood of getting projects. Before accepting a contractor bond, make sure that you only work with reputable surety companies to ensure you are purchasing legitimate bonds and contracts.

In the case problems arise, it is very important to have a contractor bond. The surety company will help you overcome the challenges with the help of accountants, attorneys, and engineers. In different situations from loss of a key member, sudden changes in site conditions, or some financial issues, the surety company will put their expertise and knowledge upfront to minimize losses and help accomplish the job the satisfaction of both project owner and contractor.