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Contractors Bond

What is Contractors Bond?

A construction bond is a type of surety bond used by investors in construction projects. Construction bonds are a type of surety bond that protects against disruptions or financial loss due to a contractor’s failure to complete a project or failure to meet contract specifications. These bonds ensure a construction project’s bills will get paid. 

    Why do you need contractors bond insurance?

    Construction bond, also known as a contractor license bond, is a required bond for a construction project. A contractor is required to have construction bonds for nearly all government and public works projects. A contractor vying for a construction job is generally required to put up a contract bond or construction bond.

    The construction bond provides assurance to the project owner that the contractor will perform according to the terms stated in the agreement. Construction bonds may come in two parts on larger projects: One to protect against overall job incompletion, and the other to protect against nonpayment of materials from suppliers and labor from subcontractors.

    There are generally three parties involved in a construction bond:

    • The investor/project owners, also known as the obligee.
    • The party or parties building the project.
    • The surety company that backs the bond.

    The project owner or investor is typically a government agency that lists a contractual job it wants to be done. To reduce the likelihood of a financial loss, the obligee requires all contractors to put up a bond. The contractor selected for the job is usually the one with the lowest bid price since investors want to pay the lowest amount possible for any contract.

    What does contractors bond cover?

    A frequent misunderstanding of contractor license bonds is they protect the contractor from being held liable for damages. Although bonds are generally issued by an insurance company, surety bond insurance differs from a traditional insurance policy.

    This type of surety bond actually protects the general public by guaranteeing construction professionals will adhere to whatever stipulations are found within the bond’s legal language. By purchasing contractor license bonds, construction professionals agree to work according to certain regulations, thus protecting government agencies and consumers from potential financial loss.

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