As a contractor on a job, you are often required to provide bonding. A bond is an assurance that should the contractor fail to meet the obligations of the contract, a surety company will provide the funding necessary to complete the work. While some smaller contractors may be bonded to cover their work, a bond is usually project specific. There are various requirements to obtaining bonding.
Particularly with large jobs and jobs in which government entities are the owner, bonds are required for a contractor's bid to be accepted. In many cases, a bid bond is required which is, in essence, a surety company's assurance to the owner that it has every intention of bonding the project, in its entirety, should the contractor win the award.
Beyond the bid bond, there are a few other types of bonds that are required if the job is awarded. Typically, an owner will request a performance bond. This bond states that the surety company will take action to complete the contract in one of several ways, at its expense, should the contractor default. A contractor and his surety company must also supply a payment bond. This bond ensures that the surety will meet financial obligations to employees or sub-contractors of the contractor should the contractor fail to do so. Finally, a labor and material bond is required to ensure that material suppliers are paid.
A contractor's experience is vital is receiving bonding. A contractor must show that he has experience and a track record that reflects his capability to do the job. The more experience and history a contractor can show, the more likely he will get bonded.
A contractor must submit financial statements to the bonding company. The surety will want to know that the contractor has been making some sort of profit over the last several years or projects. He will also want to ensure that the contractor has sufficient ready cash, assets and/or billables to show he is financially secure.
The amount of bonding that a contractor can secure is also dependent on their experience and track record. Typically, a contractor will establish a relationship with a particular surety. As time goes on and the surety does not have any issues with the contractor completing work, the more the surety will be willing to risk.
Bonding does not come free. Even though the surety is assuming the most financial risk, there are costs to the contractor. Initial the contractor will need to pay a percentage of the total bond to the surety. This is typically small, about 1 percent, however the percentage increases the more risk the surety feels they are exposed to.
If a contractor defaults on a contract, the surety will ensure that payments and performance goals are met. This does not release the contractor of responsibility. The surety will make every effort to be reimbursed the costs from the contractor. The bond serves to ensure that the project is completed in a timely fashion, even if the contractor defaults.