Contractors: What Should I Know About Bonds

Welcome to 4Contractors by 4C Advising → your place to build your strongest contractor business yet! The 4C series is simple. In each post, we answer one burning question contractors have so you can take care of business. Let’s jump in!

Q: WHAT SHOULD I KNOW ABOUT BONDS?

When discussing insurance for contractors, the term ” bond ” is often used. Beyond traditional types of insurance, a bond provides additional protection for clients who hire contractors for a job. Clients may ask you about this topic, so here’s what you need to know! 

What does it mean for a business to be bonded?

When a business is bonded it means it has purchased a specific type of insurance called a surety bond. A surety bond is an agreement between three parties that provides a guarantee to fulfill a specific obligation or a certain performance.

The three parties involved in a surety bond are:

• Principal: The party that needs to fulfill an obligation (often a contractor or a service provider).
• Obligee: The party that requires the bond and is protected by it (often a client or a government agency).
• Surety: The insurance company that issues the bond and guarantees compensation to the obligee if the principal fails to meet their obligations.

Why does a business need to be bonded?

Chances are your client (the obligee) will ask for it! Surety bonds protect the obligee if the principal fails to meet contractual obligations or perform designated tasks. The surety may cover costs up to the bond’s limit if the principal fails. Beyond that, it is up to the principal to cover the costs.

Bonds can be important in projects of all sizes, but are especially common in government or larger projects.

What are the most common types of bonds for contractors?

• Bid Bond: This bond is commonly required in the bidding process for public construction projects. It assures the project owner that the winning bidder will enter into the contract and provide the required performance and payment bonds.
• Performance Bond: This bond is often used in construction projects and guarantees that a contractor will complete a project according to the terms of the contract, including quality standards and deadlines for completion.
• Payment Bond: This bond is used in conjunction with performance bonds and ensures that subcontractors and suppliers will be paid by the contractor for their work on a project.

Want to build a stronger business? Let’s bond.

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Take it from Elias…

“Mike came thru last minute he got me a bid bond the day of my bid. When the other company that I was working with tried for 2 weeks and couldn’t bond me. He’s the one I’ll be using for all my bonding thank you Mike you’re a rock star.” -Elias

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Fusco Orsini & Associates Insurance Services and 4C Advising work in tandem to provide small- and medium-sized businesses with professional guidance as well as vetted and competitively priced insurance, risk, compliance, HR, and wellness solutions.