Contractor Bonds Explained

Contractor bond or performance bonds are a type of surety which ensures that the parties involved in the contract live up to their contractual obligations and that they conduct their obligations in a professional and an ethical manner. In order to understand the contractor bonds better, you need to know who are the parties involved in the bond, in what conditions are you advised to get a contractor bond, at what cost can you get a contractor bond, how long do the bonds last and are the bonds renewable or non-renewable.

I’ll take you step by step in understanding the above key information about the contractor bonds.

Who are the parties involved in a contractor bond?

Since contractor bonds are widely used in the construction and real-estate industry, the parties involved are mainly the contractor, the client and the bond insuring entity. The bond ensures that the contractor delivers the services in a very ethical and professional way. In a case where the contractor fails to oblige to the terms of the contract and does not offer satisfactory completion, the client is compensated as per the terms of the bond. In a case where the client fails to pay for the services conducted by the client which is mainly due to unfortunate and unforeseen events, the contractor is reimbursed for the services rendered.

In a times, the public may be covered by the bond in that if the contractor acts in unethical manner and affects the public, (this can be in events of pollution or adverse actions) the public can lodge a complaint and be paid for the contractors unethical actions.

In what conditions should you get a contractor bond?

As explained above a contractor bond can be applicable where you as a party involved in a contract you feel like you need the extra surety that the other party(s) will be fully bound unto the terms of the contract and that they will discharge their services to your satisfaction. It’s highly advised that you get involved in the negotiation of the bond in order to strike the best deal for yourself.

Cost of getting a contractor bond

The cost of securing a contractor bond is not well defined although in the construction industry the cost mostly ranges from 1%-2% of the contract price.In many a times 1.5% is the average cost of securing a bond. However if you are getting a contractor bond for a job, the cost is calculated based on the risk analysis performed to you by the insuring firm/entity.

How long do the bonds last?

Contractor bonds last according to the outlined time stated in the terms of the contract. In the construction industry, they last until the end of the project. If all the parties involved conduct their parts in a professional manner and witness a satisfactory completion, the performance bond is then reimbursed to the parties who had paid. There are still contractor bonds which last for a year, two years or in a certain specified period of time.

Are they renewable?

Yes. Most of the contractor bonds have the option of renewing upon expiry. In a case where you had secured a bi-annually bond and it expires but you still need to get another one but for a shorter period (maybe a year), then you don’t have to renew it but get a new contractor bond.