Can Contractors Work Without a Surety Bond?

surety bond - Why is it necessary for contractors to be bonded - man standing

Why is it necessary for contractors to be bonded?

Contractors which are bonded can be trusted to carry out their jobs. The bond acts as a type of insurance for the owner and ensures that if the contractor defaults on the contract, you will be compensated for your loss or damage through the bond. You can also use this opportunity to check out other contractors by using our free service.

Without getting a bond it is difficult to tell whether you can trust any local general contractor. Without some form of liability coverage, most construction companies would not even consider taking on new work unless they were pretty well established in your area already with dozens of completed jobs under their belt. 

What’s more – even though many states require general contractors to have bonding capabilities, there are still countless numbers who manage without them- so it’s critically important for you to know what types of contractor bonds are available, how they work, and why exactly you might need them anyway.

What are the advantages of being a contractor who is bonded?

Some companies, especially those doing government work, prefer to hire contractors who are bonded. Why is being bonded an advantage? Read on to learn about this process and what it means for you as a contractor.

Contractors are always looking for new ways to stand out from the competition. One way is by offering services that other construction companies don’t offer – like bonding also known as surety bonding. 

Bonding provides protection not only to your customers but also yourself because if problems arise with workmanship or materials, bonding protects you against all claims resulting from faulty service provided; these claims can be made by anyone affected. So why would someone feel the need to hire a contractor who is bonded?

Every year, many contractors are sued or have claims made against them resulting from faulty workmanship. Many times these contractors are paid in full for the work they have done, but occasionally charges are pressed against them, forcing them to pay back the money they were originally paid. 

The contractor’s license may also be revoked or suspended if legal action is taken. The best way to avoid all of this trouble is by getting bonded before starting your business so that you stand out as a serious contender who offers peace of mind to potential customers who may not feel safe working with an unlicensed and uninsured contractor.

Is a contractor bond required?

Construction contractors are required by many states to post bonds that protect subcontractors and homeowners if they fail to perform work or pay suppliers for their services as promised in the contract agreement. The contract amount typically ranges between $5,000 to $50,000 per project.

Before the state will issue you your contractor license, it will check for your bond coverage. If you can’t provide proof of either a commercial performance bond or labor & materials payment bond, then the state won’t issue you your license.

What happens if a contractor isn’t covered by a bond?

A labor and material bond helps protect homeowners from being left stranded after work has been done on their home or place of business. In the unfortunate instance where the contractor is unable to complete the project, this type of security can help get work completed quickly by helping to pay for needed materials and/or labor costs. 

This form of protection also helps relieve some stress from homeowners who have just gone through a major renovation. If you have hired a contractor who does not carry this type of insurance, you may want to give them a call and ask what they would do if more money was needed beyond your initial payment amount or tenure with them runs out.

You may find out that they carry some form of similar protection, such as a performance bond or general liability insurance, to protect both parties from these unforeseen circumstances.

Is it permissible to accept projects without first obtaining a bond?

It is permissible to accept projects without obtaining a bond. However, if you have received a fee from the owner for design services before receiving a contract, then that fee must be placed into an escrow account or trust account and kept separate from your other funds. 

This will help ensure the client has confidence in the project’s completion as well as provide protection of any fees already paid to you by the client should there be a complaint about your work down the road. When it comes time to submit final accounts/draw requests, even though you may still be owed money from your client, this money cannot lawfully leave escrow until all liens and claims against it are satisfied. 

If no lienholders exist outside of yourself, which is not uncommon, then you can simply withdraw the money owed to you for your services after all claims are satisfied. If however, you have retained entitlement to funds being held in escrow, you will need to have a third-party trustee or attorney release those funds.

Check us out to know more about surety bonds!

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