Construction Bonds Insurance | As an independent contractor or builder, you’re likely well versed in the world of surety bonds, especially License and Permit Bonds. License and Permit Bonds are typically required by a township or state to ensure the services expected of you are completed according to regulation.
A construction bond is a type of surety bond used by investors in construction projects. This type of bond protects against disruptions or financial loss due to a contractor’s failure to complete a project or failure to meet contract specifications.
Many things can go wrong in a large construction project. Because of this, construction bonds are almost a mandatory prerequisite of any project beyond a certain size, and for most—if not all—government and public works projects.
We’re frequently asked about the difference between insurance and a surety bond. Although a surety company is typically part of an insurance company, the surety bond is not a typical insurance policy. On privately funded projects, bonds create a smooth transition from construction financing to permanent financing and provide support to the contractor as well as ensure project completion. On public projects, surety bonds support pre-qualification of contractors, payment protection for subcontractors and contract completion protection for the public.
A surety bond is a three-party contract comprised of the Surety, the Principal (contractor) and the Obligee (owner). The Principal promises to perform in accordance to its contract obligations. Surety bonds used in Construction are called Contract Surety Bonds.
Keep reading to learn more about License Bonds and Permit Bonds and how they affect your business.
If you have been told you need a surety bond for your small business, you might be confused about what you need to get.
There are 25,000 different types of surety bonds so it is impossible to speak to all of them, but here are five types of bonds that various small businesses might need before they can open their business doors.
As with all surety bonds, the bond does not protect the business. Surety bonds protect the customers of the business.
If a customer feels they were wronged, they can make a claim against the company’s surety bond.
#1: License and Permit Bond
A License and Permit Bond is a type of surety bond that small businesses might need before they can receive a business license.
Common types of license and permit bonds include:
- Notary Bonds
- Contractor License Bonds
- Motor Vehicle Dealer Bonds
- Private Investigator Bonds
- Mortgage Lender/Broker Bonds
- Collection Agency Bonds
License and Permit Bonds are required by law. If your license type requires a surety bond, the licensing agency will let you know. Read more here…
A payment bond is required on many construction projects. In the construction industry, the payment bond is usually issued along with the performance bond. The payment bond forms a three-way contract between the Owner, the contractor and the surety, to make sure that all subcontractors, laborers, and material suppliers will be paid leaving the project lien free. A Payment Only Bond is rarely requested and is usually billed at about 50% of the regular premium.
The Surety is the company licensed by the Insurance Department and the regulatory agencies to write bonds within the state of the country on which the work will be executed. The Contractor, also called the principal, promise in the payment bond that the contract will be executed according to specified terms, while the Surety promises that if the contractor fails on his payments, it will pay damages to all demanding parties.
On a private project, the payment bond might become a substitute for a mechanic’s lien. When the principal or contractor fails to pay the suppliers and the subcontractors, they might collect from the surety under the payment bond. Payments under the bond will deplete the penal sum, an amount less than the total prime contract, intended to cover supplier and subcontractor costs.
Construction Bond Eligibility
Each surety has its own criteria for deciding the eligibility of applicants for construction bonds. Standard criteria include having the right skill level, resources and ability to perform the requirements of the contract. The surety will analyze the applicant’s financial statements and investigate work history, financial standing and credit rating. Contact us here: (951) 813-2999.
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Dee (Deidre) writes and Curates for several Financial Services Site Blogs. We’re glad to have her.