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The Cost of Securing a Contractor Bond

A Contractor Bond is also sometimes called a Performance Bond. These bonds are a form of insurance issued by a bank or an insurance company to guarantee the proper completion of a building project by the contractor. It is quiet common for a client to insist on such a bond to be put in place in favor of the client prior to construction beginning. In the event of a contractor failing to complete the building due to insolvency or if the building is not completed in line with the clients specifications the client will then be compensated for losses up to the value of the bond.

The bond therefore exists to cover the client’s losses, for example if they have to engage another contractor to complete the building or to bring it up to final specifications.  A Contractor Bond will not necessarily cover the full cost of the building contract. After all and in the unlikely event of the contractor going out of business before the first shovel is turned, the loss to the client will be small. Instead the Contractor Bond will normally cover between 10% and 25% of the total contract value.  Here is a look at different bonds.

A Contractor Bond is mandatory in many countries, including the USA, for any Federal or Government contracts. There are a number of types of Contractor Bonds, for example Payment Bonds guarantee that all sub-contractors, laborers and suppliers will get paid.

Maintenance Bonds

Maintenance Bonds will provide a warranty for work done for a specific time period after completion. So how much does a Contractor Bond cost. ? The cost is usually less then 1% of the contracted price although if the contract is less then $1 million then the premium may run to 1% -2%. The credit worthiness of the contractor will also impact on the price.

High Risk

Companies that are deemed to have a higher risk, perhaps a new start-up with limited history or a contractor who has a track record of issues will be charged a higher rate for a Contractor Bond. It is important therefore that when pricing a project, the requirement for a Contractor Bond is understood and the cost of these Bonds is built into the pricing.

The most likely reason for a Bond to be called upon is in the event of the Contractor going insolvent and ceasing business. Whilst this does occur, thankfully it is rare. Like all insurance contracts the hope is always that there will never be a need to make a claim.

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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.