Contractors Bonding Issues | Learn how to get license bonded if you are a contractor
In recent times, the construction industry has proven to be increasingly resilient. It is even expected to experience robust growth. Spending for construction has increased in the past year, while there are more and more job openings being posted every day. Definitely good news for all contractors, right?
Despite the said good news, you can benefit even more from your construction business by making sure to bond your construction projects. Let’s refresh our memories first and talk about what exactly surety bonds are in the construction field.
Within construction businesses, there are two surety bonds, namely, contract bonds and permit bonds. Then under contract bonds, there are three more bond types and these are performance, bid, and payment bonds.
Using a general definition, surety bonds are typically an agreement between three parties, which include the two groups involved in the construction project and the surety company. The project owner is called the oblige who usually enlists a contractor to get a construction project done and then require them to put up a bond in order to minimize the risk of financial loss. The contractor is called the principal who then submits the bond, guaranteeing that he can finish the job according to the points stipulated in the contract. The third party is the surety company who provides assurance to the oblige that the contractor will act according to what is agreed.
However, contractors can’t just obtain a bond very easily as surety companies must run a background check on the company and their financial capabilities before approving the said bond. Usually, a premium has to be paid by the contractor and this is calculated based on the possibility of an unfavorable event occurring. Therefore, the more credible and financially stable your company is, the smaller your premium fee would be.
Now that we’ve covered the basic definition of a surety bond in construction fields and the basic process of obtaining it, we can almost say only advantages and benefits await us. However, it is a known fact that there would always be problems to be encountered in every action and endeavor. The same is true in construction projects despite the surety bond already in place or even in the middle of obtaining it. In this article, we will talk about and list some issues contractors face in the bonding process.
Problems on a bonded project
As the construction industry experience a boom in recent months, there is also more pressure pressed unto contractors, and more responsibility in making no room for errors. Nevertheless, troubles are still to be looked out for and there are different reasons for them, such as poor site circumstances and faulty contract documents. Whatever the source is, it usually affects cash involved and has to be acted upon immediately.
During these times, a close relationship with surety companies can help contractors discuss their problems with people who may be able to help and give advice. Surety companies commonly know several experts in the financial and engineering fields who can work with contractors, and help settle issues and offer ideas.
Contractors are therefore reminded to know when to address difficulties, usually at the first sign, and ask for aid from their surety companies in order to avoid major problems that would be harder to resolve in the future.
Eligibility of getting bonded
In the construction industry, it is already a prerequisite that you be able to get a license bond in order to perform work and get a contract bond once a project is offered to you. Most contracts typically require you to be bondable, not only in the field of construction, but also in other kinds of businesses. This is where your success in business also depends on. If found to be not fit to be bonded, you won’t be able to get projects and might lose your business.
Therefore, in order to succeed as a contractor, it is imperative you work hard to preserve your credibility and status, which is the basis for getting bonded. You wouldn’t want to face any issues right at the start of getting a project offer.
Start with smaller construction jobs
If you are just starting your construction business, it would be a better idea to start with smaller projects in order to build your foundation and gain experience. After all, a surety bond guarantees that you have the ability to complete the project. If you fail to do so, you would have to pay a particular amount of money. It is therefore recommended you choose only those projects you are capable of working on.
If you start with smaller jobs, you can get yourself acquainted with the whole process while gaining experience in order to prepare yourself for bigger projects and getting yourself a good track record for future bonding purposes. By doing so, there would be less issues to be expected.
Contractors may face default at one point, no matter how good they may be at work. In fact, it has been shown in studies that there is a 26% failure rate for contractors. This is why surety bonds are made sure to be put in place at the beginning of the project in case of problems, which may range from financial difficulties to performance issues. Once it gets too difficult and intense, there is no other choice but to announce default. So, how do these surety bonds work during this case?
Defaults can become messy for contractors. Therefore, the actual cause and situation would first be investigated by the surety company to make sure the bond claim made by the project owner is legit. If found to be invalid, the project continues. However, if the contractor himself defaults, the surety takes over and would also perform an investigation. Although if notified early on, the surety would do whatever they can to avoid default.
Once a default by a contractor has already taken place, there are solutions sureties usually implement. The surety might take over the project and oversee completion, or search for a new contractor to take over. This new contractor would have to be approved by the project owner as well, and would have to also obtain a bond.
Another approach sureties follow is to provide assistance to the original contractor. This might take form in financial assistance or provision of extra or better-skilled personnel. However, this kind of solution can only be usually possible in contractors who have excellent credibility or with whom they have worked with in the past, confirming that trust between sureties and contractors is a fundamental element.
Finally, sureties can also decide to leave the construction alone to the original project owner and let them complete it by finding their own new chosen contractor. Nevertheless, sureties would still have to provide payment to the project owner, usually the maximum amount of the contractor’s surety bond, in order to make up for the losses they encountered.
The bottom line
In conclusion, problems abound in contractors surety bonds despite its numerous benefits. It’s normal for these issues to crop up during construction itself and while some might be resolved without difficulty, some would also have to be formally acknowledged. For the best protection, it is best to equip yourself with detailed knowledge on the contract and bond you have.
Despite how it’s commonly known to protect obliges or project owners because of its guarantee of an accomplished job, it is important that it be recognized as also an assurance to the contractor that there is support readily available should they run into complications during the entirety of the project. In the end, both these conclusions show that outcomes to the problem can still rely heavily on the contractor and his willingness to be proactive.