One of the best ways for companies to get business and grow is to participate in public project bids. Winning a public project as a contractor result not only in income but also credibility and opportunities for future work. However, many factors determine the winner of such bids. Of course, the price a company has offered for completing a project is an important thing. But it is far from being the only factor that determines who gets the project.

In order to participate in public tenders for a variety of industries, a business needs to obtain a contract bond. It can also be a requirement for some private projects. A contract bond is essentially a monetary guarantee that a contractor will successfully complete the project. If something goes wrong, a claim will be filed against the bond.

In this article, we will talk about contract bonds and why they are important for contractors. We will also explain how a bond can be filed against and what types of contract bonds you can acquire.

What Are Contract Bonds?

Contract bonds (also known as contractor bonds) are a type of surety bond, guaranteeing that a business will fulfill all Contractual obligations and maintain all industry standards and regulations for a given project. While many industries make use of contract bonds, they are mostly used by construction companies. Such bonds are designed to protect project owners in case the contractor does not complete a project or defaults.

Surety bonds are legally-binding financial guarantees that exist to protect customers, subcontractors, suppliers, and local/state governments. The bond agreement is made between three-party agreements: the principal (construction company,) the obligee (party requiring the bond—government agency), and a surety provider. The surety provider issues the bond and acts as a financial guarantor—agreeing to furnish compensation if a valid claim is filed against the bond.

How Can Consumers Access a Bond?

Claims against a surety bond can be made by a government body, a project owner, or a consumer that uses the services of the bonded contractor. If one of these parties decides that the principal has violated the terms of their agreement, they can get in touch with the surety company directly and file against the contract bond. Bond claims can be enforced in court if necessary, but that is rarely the case.

Types of Contract Bonds

There are quite a few types of contract bonds, each designed to protect a different stage of a project. From the bidding process to post-completion maintenance work — there are separate contract bonds for each step. Below, you can see some of the most common contract bonds on the market.

  • Bid Bond — A standard requirement for all public tenders, the bid bond ensures that a contractor will honor the price they have submitted for the project.
  • Performance Bond — This bond guarantees that the contractor will complete the project as per the contractual agreement, complying with any applicable industry standards and regulations.
  • Payment Bond — It ensures that any third-party personnel (subcontractors, suppliers, temp workers, etc.) will be properly compensated for their work.
  • Maintenance Bond — This is a guarantee that the project will perform up to expectations and will not have any issues within a certain period after completion.

The Benefits of Contractor Bonds

There are many benefits associated with contractor bonds, with the primary one being the ability to participate in bids for public projects. As we already mentioned, almost every such tender requires all bidders to be fully bonded as per the project. However, the advantages of contractor bonds do not end there.

Like all surety bonds, contractor bonds are essentially a guarantee that a business operates with integrity and in an ethical manner. Bonds are designed to protect customers, giving a brand more credibility and a higher chance of attracting new clients. That is especially important for new contractors just starting out — becoming bonded can be the crucial step they need to get their business off the ground.

As for private projects, being fully bonded might be the difference between getting a job and being rejected. Contractor bonds showcase a dedication to customer satisfaction and willingness to provide a financial guarantee for the quality of work. For many customers, this might be the deciding factor to choose a contractor.

It is important to point out that even though contractor bonds are a requirement for some industries, they are rarely ever used. Cases where an obligee actually files against the bond of a principal do not occur often. Still, it is better to have this protection in place and never use it rather than not have it at all.

Another thing you should know is that surety bonds, in general, are easy to acquire. While the surety company will certainly perform all required background checks on a business that applies for one, it is fairly unlikely that the bond application will be rejected. However, if your company has serious credit issues, it’s possible you won’t qualify for bonding.

Conclusion

As you can see, contractor bonds are important in more ways than one. Even if a contractor is not operating in an industry that requires them, getting bonded might still offer a competitive advantage.

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