The Importance of Surety Bonds for the Concrete Contractor
Placing concrete requires specialized skills and equipment. The licensing requirements for concrete contractors vary from state to state. In some states, concrete contractors need a specific license for working with concrete. In others, licensing for concrete contractors is included in the general contractor’s license. To obtain a contractor’s or concrete license, you must meet multiple conditions. A common licensing requirement is a surety bond. There are also other types of contract bonds you will likely encounter in your work.
Many public and private projects require contractors to be bonded and licensed. Construction surety bonds protect the project owners, the public, subcontractors, and suppliers. Owners, subcontractors, and suppliers are protected by bonds against nonpayment by the general contractor, and owners are protected against performance failures and contract defaults. Here is what you need to know about surety bonds and their importance to concrete contractors.
What Are Surety Bonds?
Surety bonds are financial guarantees and legally enforceable contracts involving these three parties:
- Principal: The company or individual that must secure a bond
- Obligee: The government agency or project owner that requires bonding
- Surety: The bond company that guarantees the principal’s regulatory compliance and contractual performance by issuing a surety bond
Unlike insurance, bonds do not protect the principal from liability. Instead, surety bonds are meant to protect the obligee and the public against the principal’s potential legal violations, nonperformance, fraud, nonpayment, and other types of contract failure. If a contractor fails to follow the law or meet its contractual obligations, bond claims can be filed. While the bond company will pay valid claims, the principal will have to fully repay the surety for all amounts it disburses.
This is because the surety will require the principal to sign an indemnity agreement at the time it issues the bond. The indemnity agreement is a legal contract through which the principal agrees to hold the surety harmless for financial losses caused by the principal’s failures. If you fail to reimburse the surety for a valid bond claim, you will face litigation and be forced to fully repay the surety for both the amounts paid on the claim and the surety’s legal costs incurred while pursuing damages against you.
Common Types of Surety Bonds
The contractors’ bonding process for concrete contractors might include several common types of bonds. These bonds fall into two main categories: license bonds and construction bonds. Here is some information about the most common types of bonds you might encounter as a concrete contractor.
Contractor License Bond – Depending on where you plan to operate your business as a concrete contractor, you might be required to obtain a concrete license or a general contractor’s license. Most licensing authorities require surety bonds as a condition of licensing. This means that before a license will be issued to you, you will need to secure a contractor license bond.
This bond guarantees that you will comply with all relevant local and state laws governing your industry. It protects the state if you violate the law and consumers if you provide substandard work or fail to complete a job.
Payment Bonds – Payment bonds are a common type of construction bond required by project owners. Project owners might require a general contractor to secure a payment bond, which guarantees that the general contractor will pay the subcontractors and suppliers for the work they perform on a construction project.
A payment bond protects the project owner from potential mechanic’s liens filed by the suppliers and subcontractors for nonpayment. As a concrete contractor, making sure the general contractor on your project has a payment bond also protects you against nonpayment for your work and the concrete and other materials you provide. If the general contractor fails to pay you what you are owed for pouring concrete, you can file a claim against the payment bond to secure payment without having to go through the process of getting a mechanic’s lien against the owner’s property title.
Performance Bonds – A performance bond is the second type of construction bond that might be required by project owners. This bond guarantees that the contractor will perform their work according to their contractual requirements. A performance bond protects the project owner against substandard work or contractor default mid-project. Performance bonds are typically required of contractors that want to perform work on public projects, and many private owners also require performance bonds as a condition of their contracts.
If you contract to perform concrete work as a subcontractor, you might be required to get a performance bond. The general contractor can file a claim against your performance bond if you fail to complete the job or perform shoddy work, and the project owner can also file a claim against your bond if the quality of your work fails to meet the contractual requirements.
Bid Bonds – Bid bonds are a third common type of construction bond you might encounter in your work as a concrete contractor. These bonds guarantee that you will follow through on a contract if you submit a winning bid. If your bid is accepted, you will have to perform work under the contract even if you learn that other companies bid far higher amounts for the same job. A bid bond prevents you from backing out of the contract even if you left something out of your bid.
Why Concrete Contractors Might Need Surety Bonds
As an initial matter, you might be required to secure a license bond as a condition of getting a license as a concrete contractor. If you are located in a jurisdiction that requires concrete contractors to be licensed, you will not be able to run your company without getting bonded and licensed. If you do, you could face legal penalties and be forced to close your business.
In addition to a license bond, you might need to purchase construction bonds to perform work on specific projects. Owners of large projects typically require contractors to secure bonds to protect them from losses caused by nonperformance and other issues. Getting the required bonds might allow you to perform work on projects that would otherwise be out of reach.
Types of Projects That Might Require Construction Bonds
Both public and private projects might require you to secure certain types of construction bonds. Under the federal Miller Act, contractors that want to perform work on federal projects valued at $100,000 or more must secure performance and payment bonds. If you want to bid on a public project, you will also need to secure a bid bond. Similarly, individual states have laws called “Little Miller Acts” that require contractors to secure performance, payment, and bid bonds before they can start work on state projects worth more than each state’s minimum threshold.
In addition, many savvy project owners require contractors, including concrete contractors, and suppliers to provide surety bonds before the owners will agree to contract with them. Since a private project owner asks the contractors to purchase bonds, the bond cost is typically added to the contract price.
Bonds are typically required when a project owner wants greater financial protection for a project. While your contract will likely include provisions about how failures to perform will be handled, the owner will not have financial protection if that occurs. If you fail to perform or complete your work, the owner could have to pay more money to complete the project after your default without a bond requirement. Requiring bonds helps to protect project owners from losses caused by contractor default. This is especially important for public projects that involve expenditures of taxpayer money.
Benefits of Bonds
While surety bonds won’t protect you against liability, they still provide some benefits. Without a license bond, you might not be allowed to legally work as a concrete contractor in your local or state jurisdiction. You need to check with your local and state governments to learn about your licensing and bond requirements.
Beyond allowing you to secure a license, being bonded might also make you more attractive to project owners. Many owners will not work with concrete contractors who are not bonded. Securing the bonds needed to perform work on private projects might expand your business by allowing you to access more customers and work on more projects.
How to Get a Surety Bond
To obtain a surety bond, you can apply through a surety company. The company will not automatically approve your application, however. Instead, your application will undergo underwriting. The surety company might ask you to submit additional documents to demonstrate your experience, finances, history, and credit. If you have significant experience, an established reputation, and excellent credit, your application will likely be approved. To secure a bond, you will need to pay a percentage of the total bond amount as an up-front premium. For concrete contractors with excellent credit, this can be as little as 1%. However, if your record is blemished, you could be denied or be forced to pay a higher premium of up to 10% or more.
Once you are bonded and licensed, make sure to adhere to the law and perform work according to the provisions of your contracts. Doing so can help to build your business’s reputation and allow you to secure lower bond rates in the future.
Source – ForConstructionPros.com
