Contractors use bonds
in a variety of situations. Several different kinds of contractor
bonds exist, and each one is suited for a particular purpose.
Discover some of the more common kinds of contractor bonds along with
when you need to use each if you run a contracting business.
When You Propose a
Project: A Bid Bond
While you may be able
to land small jobs without a bid bond, you'll usually need one when
you propose larger projects. Specifically, if you propose projects in
a competition to win a commercial or public works construction,
you'll need one of these.
When you need a bid
bond, your company will purchase one from an insurer and list the
organization that you plan to propose a project to as the principal.
A bond's principal is the party that receives compensation if the
terms of the bond are violated, and the organization you propose to
will be paid by the bond if you fail to deliver on a proposal.
The purpose of this
kind of bond is to make sure whatever contractor is awarded a job
ultimately completes the proposed work. With this type of bond,
companies and governments that have big projects don't need to worry
about what will happen if a contractor they hire isn't able to do all
the work. The company or government will receive compensation if that
happens.
You should expect to
purchase a contractor bond each time you propose a project for work
that requires bids. Even though only one contractor is ultimately
hired, everyone often needs their own bid bond in place when they
submit a proposal.
When You Get a Job:
A Performance Bond
Once you're awarded a
big job, you'll likely be asked to carry a performance bond. A
performance bond is like a bid bond in a lot of ways. An insurance
company underwrites both, and the company or government you work for
is the principal in both cases.
With a performance
bond, the company or government is paid if you fail to do work that
has been contracted. The only difference is that a bid bond is for
proposed - rather than contracted - work.
Often, a performance
bond will follow a bid bond. After your proposal is accepted and you
sign a contract, you'll probably drop the bid bond and get a proposal
bond. In a few cases, you might need a performance bond for work that
doesn't first require a proposal.
When You Begin Work:
An Ancillary Bond
An ancillary bond is
similar to a performance bond in that it guarantees a contractor will
complete work that they've contracted with another organization to
do. If the contractor fails to deliver, the bond will pay the company
or government as the bond's principal.
Ancillary bonds,
however, specifically guard against non-performance that arises from
incidental issues that aren't directly related to a contract. For
example, this kind of bond might pay out if weather issues or riots
delay a project's completion.
When You Hire
Subcontractors: A Payment Bond
Subcontractors are
common in the construction industry, and they need to be paid for the
work that they do. Whenever you hire subcontractors to work on an
aspect of a major project, you may have to get a payment bond as a
guarantee that the subcontractors will be paid.
Depending on the nature
of a project that you take on, you might be asked by the company that
hires you or the subcontractors you hire to carry a payment bond.
Another company might want it so that subcontractors don't come after
the company if you fail to pay the subcontractors. Subcontractors may
ask for it simply so they know they'll be paid.
If you need a contractor bond, contact
Golden State Contractors School.
