Do Small Home Renovations Contractors Need to Have a Construction Bond?

Construction bonds have been around for years and are mostly associated with large projects and undertakings. Many small home renovation contractors never consider bonds and this can keep them from successfully bidding bigger projects where bonds are very crucial. It is important to understand that there are various kinds of construction bonds available and while large construction establishments often have all of them, small businesses may need one or two. However, do they really need to have a construction bond to operate?

Legal requirements

Construction companies are required to have a construction bond to legally operate within their area. Different states have different legislation and requirements, but all will need bonds. A construction bond, also referred to as a construction surety bond, is a type of surety that guarantees your work to the owner. As aforesaid, there are different bonds available including;

  • Bid bonds – these are paid to bonding companies to give you an edge to bid on bonded jobs. The bonding company will pay performance and payment bond if you are awarded the contact.
  • Performance bond – this surety guarantees your work to the owner and the stipulations for performance quality are in the contract.
  • Payment bonds – this bond guarantees that you will release payment to laborers, suppliers and sub-contractors.
  • Maintenance bonds – you guarantee that you will offer post construction services as stipulated in the contract
  • Supply bonds – these bonds ensure the supplier holds their end of the bargain by delivering supplies as agreed.

If you are a small business dealing with renovations and small tasks, bonds may not seem all that important as most customers will be fine with quality guarantees and provisions to redo the task if initial attempts do not meet the agreed quality standards. However, this limits you from undertaking major renovation assignments. What’s more some owners simply won’t contract you without bonds.

Why you may need a bond

Bonds expand your available projects and make it possible to undertake various projects. A sample construction bond is $500,000-over-$1,000,000 bond lone. This means you can only take on projects up to $500,000. The $1,000,000 cap gives you a chance to take on two projects $500,000 each or four projects worth $250,000…. You can now see that bonds are very important for construction businesses especially if you hope to expand and serve a bigger market. They do not only improve your surety relationship, but also market you as a reliable construction business that can undertake a task to its completion.

When owners find out you have construction bonds, their fears are immediately scattered and they begin to trust you more. They can even recommend you to other clients once the construction is completed. Small renovation businesses can still handle assignments on high-end homes that cost millions of money so it is important to have construction bonds if you want to get such opportunities.

What Can Happen if Your Contractor isn’t Bonded and Insured

A surety bond assures the contractors, clients or investors that the contractor will perform the contract to completion, or if they fail their responsibility, the funds will be availed for another contractor to do the Job. Contractor bonds, therefore, protect against loss and poor artistry. Hiring unbounded contractors may come with several bottlenecks.  Let us discuss them below.

Unbonded Contractor

Unbonded contractors may signal a weakness in financial capability to perform their mandate to completion. This may mean that if the contractor is incapacitated to complete the job, the client suffers a financial loss and cannot be covered. It is also impossible for the investor to place a claim to any company for the loss incurred. Therefore, bonding indemnifies the owner of the project against such.  Here are some of the risks of hiring an unlicensed unbonded contractor.

Risk of Non Bonded Contractor

Secondly, non-bonded or uninsured contractors may pose the risk of poor performance of the contract. It is possible that uninsured contractor may not possess the requisite skills to do the job as stipulate in the terms and conditions of the contract. In other words, the investor stands to risk losing the whole project or receiving substandard service. If this happens, then the investor loses the right to have the work redone at the cost of an insurer. This is because your state contractor board will be reluctant in helping you make a warranty claim against an unbonded contractor. Even if you take the case to a civil court and win, there are chances that the contractor will not be able to pay.

Risk for Investors

As an investor, you risk being liable for payments owed by the contractor to the subcontractors in case they are not bonded. This is true if the non-bonded contractor refuses to pay the suppliers and subcontractors. This will mean that you will shoulder all the obligation to pay all the contractors and their associates all their dues. On the other hand, should an accident occur at your premises, you will completely be liable to pay for all the overhead costs that result from the same.
To avoid contract disputes, you will need a bonded contractor. In most cases, the contractor often disputes the completion percentage, or delay the project, which may lead to holding the part of payment resulting into a tussle.

In general, you are safe only with bonded contractors since you are secured from loss, poor workmanship and non-performance of the contractor. As an investor Always try to check for the right contractor to ensure that they are licensed, bonded and insured, this will go a long way to keeping your reputation.