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Contractor's Surety Bond

A contractor's surety bond is an agreement between the contractor, client and a surety issuing company. . The contractor is also referred to as the bond principal, while the customer is referred to as the obligee.  In most states, the contractor is required to be bonded before a license can be issued.  Big projects normally require a specific bond that covers only that particular project.

Functions of the Bond

A surety bond for contractors offers a financial assurance that the contractor will do the job correctly and in a timely manner. In case the contractor fails to make good on his obligations, the insurer will pay a pre-determined amount to the client.  The bond may also include reimbursements for damages to properties due to the fault or negligence of the contractor, unpaid materials suppliers or subcontractors, and stolen or lost materials.

Significance of the Bond

The bond helps in attracting clients as they are given more assurance on the contractor's capability to finish the job.  This is important when you are dealing with a new client who is not sure about the contractor's quality of work.  Suppliers and subcontractors may likewise prefer working with a bonded general contractor simply because there is assurance that they will receive their payments as stipulated in the contract.

Bond Amount

The amount of premium for a contractor's surety bond is primarily based on the surety's risk assessment and the bond's payout amount.  The underwriter will analyze the history of contractors as far as relationships with owners, suppliers, subcontractors, architects, and engineers are concerned. The contractor's current net worth is also considered in determining the bond's failure risk probability.

A contractor who has a significant amount of assets under his name is more likely to finish a job compared to one who is struggling to even meet his monthly payroll requirements.  A bond amount is set depending on the available employees and equipment at the contractor's disposal that are indicative of the company's delivery potentials.

Important Considerations

When in need of surety bonds, contractors should shop around first as rates may vary between providers. Some companies offer higher limits that allow contractors to place bids for bigger projects. The surety company's reputation and financial strength are also important. Clients and suppliers may sometimes be hesitant to work with contractors whose bonds are issued by unknown companies.

Filing a Claim

In general, contractor's bonds require obligees to file pre-default notices in order to give the insurer an opportunity to avoid defaults. A meeting is initially scheduled between parties involved in the default such as the client, surety, contractor, and concerned suppliers and subcontractors. If it becomes apparent that the parties will not come to an agreement to complete the job, the surety may, at its discretion, decide to finish the task or bring in another contractor.

If it is merely a question of funding, the insurer may loan or advance the amount to the contractor so he can complete the job.  However, when default is inevitable, the surety company is required to pay out what is stipulated in the surety bond.

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