A contractor license bond is often required to get a contractor license issued. But can that bond be put to work for other purposes, such as guaranteeing a contract? The short answer is no. License bonds and contract bonds serve two different purposes. Keep reading to find out the difference between the two, and which contract bonds are likely to help you win a bid, get the job, and build your business.
Contractor License Bonds vs Contract Bonds: What’s the Difference?
A contractor license bond is a guarantee that you will do your work according to the rules and regulations set forth by your state’s licensing board. In other words, that you will adhere to the letter of the law when doing your work. A license bond is required in most states if you want to get a contractor license.
Does your state require a license bond? We’ve compiled a list of which states require a contractor license bond to help you find out.
While your license bond assures potential and current clients that you will perform your duties to the standards of your license and not violate state license laws, it does not guarantee performance of a specific contract.
That’s a job for contract bonds.
Contract Bonds for Construction Pros
Contract bonds, which are also known as construction bonds, provide a guarantee that you will complete a job in accordance to the conditions set forth in a contract. Contract bonds are required on all federal project above $100,000, and for many state level projects as well. But the public sector isn’t the only place where you may be asked for a contract bond to get the job; more and more private projects require contractors to be bonded, as well.
Types of Contract Bonds
As a project progresses through different phases, different types of contract bonds may be required of you.
Bid Bonds
Bid bonds guarantee that you will fulfill the project at the bid price, which can help narrow the bid field and discourage reckless bidders from entering the bid pool. A bid bond also guarantees that you will provide any other required performance bonds, as well. Bid bonds are required at the initial phase of a project in order to make a bid.
Performance Bonds
Performance bonds guarantee that you will complete a project according to the contract set in place. This bond protects project owners from contractors who fail to fulfill their duties. A performance bond is often required after your bid has been accepted and you’re awarded the contract.
Payment Bonds
Payment bonds guarantee that you will fulfill your financial obligations to material suppliers, laborers, and subcontractors. A payment bond protects project owners from construction liens, as well as protecting your suppliers and subs from the hassle of non-payment. Payment bonds and performance bonds are often issued together as a “performance and payment bond,” and are required once you’re awarded the contract.
How Contract Bonds Work
Contract bonds, like other types of surety bonds, are a contractual agreement between three parties:
- Obligee: The party requesting the bond (project owner or the state)
- Principal: The party obtaining the bond (the contractor)
- Surety: The party issuing the bond (surety bond company)
If a contractor (the principal) defaults on their obligations, the claim process is initiated by the project owner (obligee). The surety company will then investigate the claim. If the contractor is found to have breached their surety contract, the obligee is compensated up to the full amount of the bond. If the surety company compensates the obligee, it will seek reimbursement for the amount paid from the contractor. In the end, not fulfilling a contractual obligation will cost the contractor.
Contractor license bonds and contract bonds are a necessary part of doing business in the construction industry. They protect consumers, project owners, materials suppliers, subcontractors, and laborers. But contractor bonds provide a benefit for you, too. When you are licensed, bonded, and insured, you can bid (and be awarded) higher paying projects. You also have a competitive advantage over people doing construction work without licenses, bonds, or insurance. Obtaining the necessary bonds required by the construction industry shows that you are a responsible professional who can get the job done.
Your contractor license bond may be the first bond you obtain as a construction professional, but if you really want to build your business, it won’t be your last. If you want to guarantee that you’ll fulfill your contractual obligations, you’ll need contract bonds, too.