August 1, 2012
The license bonding process: what contractors need to know
There are two sides to every construction project: the project owner’s side and the contractor’s side. In both roles, certain precautions must be taken to ensure the job gets done well and according to schedule. The best way for contractors to certify that they’re highly skilled and reputable from the get-go is to be licensed and bonded according to industry requirements.
As project owners go through the process of hiring a contractor — from obtaining referrals and interviewing candidates to narrowing the field and finalizing the deal — they should always keep one piece of criteria in mind: the contractor needs to be properly licensed and bonded. When combined, stricter building laws and increasingly valuable construction projects mean it is in a contractor’s best interest to be able to provide official licensing and bonding documentation at a moment’s notice.
So, how can contractors get licence bonds?
Most governments require surety bonds as a prerequisite to the contractor licensing process. To get bonded, contractors simply apply for a bond with the help of a commercial surety provider. Nationwide bond companies work with a variety of markets so they can provide bonds to individuals with a wide variety of financial backgrounds. For this reason, most contractors have no problem getting their licence bonds. Once they’ve been approved and have paid for their bonds, contractors receive their bond paperwork and can apply for a contractor’s license in their area.
What can go wrong during the bonding process?
There are two things that can go wrong during the bonding process:
— the applicant doesn’t understand how a surety bond works and/or why it’s needed.
— the contractor does not meet the requirements to be approved for the needed bond.
Anytime you make a big purchase or get involved in the complicated world of business insurance and legal requirements, it is best to be as knowledgeable as possible. To understand what a surety bond is, let’s break it down.
A surety bond legally and financially binds three parties together. The principal purchases the surety bond. In this case, the contractor acts as the principal. The obligee requires the principal to purchase the surety bond. In this case, a government agency or other project owner acts as the obligee. The surety provides the bond. In this case, the insurance company that backs the bond acts as the surety. When a contractor purchases a surety bond, he pledges that they will:
— adhere to the terms of the contract
— follow local, provincial/state and federal regulations regarding contract and construction work
— complete the project on schedule
To put it simply, when a contractor has a surety bond, government agencies and other potential project owners know that he has a bond that financially guarantees his ability to complete projects in a skillful, reliable, timely and credible manner.
How much do contractors bonds cost?
Contractor surety bonds are some of the most commonly requested bond types, so most commercial surety producers can issue them. The cost of a contractor bond depends on a few factors, including:
— the specific contract bond type needed and its associated risk
— the bond amount required by the developer/project owner
— your personal and professional financial credentials
— in some cases, the developer/project owner’s unique requirements
For example, contractor licence bonds fall under the licence and permit bond category, which generally involves little risk. Therefore, qualified applicants receive rates that are typically one to five per cent of the bond amount. So, if a government agency requires a contractor to purchase a contractor bond worth $10,000 before he can be licensed to work in the jurisdiction, a qualified contractor will pay between $100 and $500 to purchase or renew such a bond.
As a new contractor, purchasing a surety bond should be one of the first things you do. With a bond and licence in hand, you’ll appeal to project owners who want their jobs done well. Then, as time progresses, potential employers and clients will look past the paperwork and focus solely on your reputation as a hardworking, skilled and reputable contractor.
Sara Aisenberg is the executive writer for the Surety Bonds Insider, a blog that focuses on all facets of the surety industry. For more information on contractor bonding, you can find Sara on Twitter @SaraAisenberg.
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