Your contractor says that he’s bonded. What does that mean?
- A bond protects your interests as the owner and ensures the contractor fulfills his/her obligation
- A bond has no value to you until you are named as the obligee
Bonding is the process by which a contractor submits certain financial information, sometimes only his credit score, to a financial institution and surety company such as Travelers, Hartford and US Fire, in order to obtain a bond. The fact that your contractor is bonded means nothing to you unless you are named as the obligee on the bond. If your contractor is bonded or bondable and you want to be protected by the bond, you need to request a bond in your favor from the contractor before you sign any contract.
Payment and Performance Bond
Bonds come in two parts, namely payment and performance bonds. These bonds are contained on two separate pieces of paper, but are typically issued together.
The payment bond ensures that the subcontractors on the job- the plumber, electrician, roofer and all of their suppliers, the people that provide the plumbing materials, the electrical materials, the stucco, the concrete, the pavers, are all paid according to the contract. Payment is guaranteed if the contractor obtains a payment bond for the value of the contract of your construction.
The performance bond guarantees that this contractor is going to finish this job on time and on budget consistent with the terms of the contract that you have with him. If your contract is well written and gives the contractor a time limit to get the job done, say eight months, and the contractor doesn’t finish in eight months, you could make a claim on the contractor’s performance bond and potentially obtain liquidated damages and other delay damages to finish the job.
Remember, the fact that your contractor says that he is bonded or bondable, means nothing to you until you obtain the bond that names you as the obligee.
How much does a bond cost?
Usually, a bond costs between 1 and 3 % of the total contract value. The lower amount is for a more stable bonded contractor with a more solvent and reputable surety. For a relatively new contractor that doesn’t have a lot of available credit, and maybe only able to obtain this bond with his personal credit, that contractor may have to pay a 3 % premium.
Sometimes, contractors charge more than their actual cost, so make sure you look for the receipt or the invoice on the bond to be sure you are only paying its actual cost, not a markup cost.