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Surety bonds for construction businesses and contractors

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Surety bonds

Surety bonds act as a contract between a business, a client, and an insurance company. They guarantee the insurer will reimburse the client if the business fails to deliver contracted services.

Construction bonds guarantee your company will finish the job

When you sign a contract with a client, they expect you to live up to your side of it. That includes finishing a project on time and as promised.

A surety bond, also called a construction bond, guarantees that your construction company will fulfill the terms of the contract. If your company is unable to do so, then the insurance company reimburses the client for their loss.

What is a surety bond, and how does it work?

A surety bond is an agreement between three parties:

  • Your business (the principal)
  • Your client (the obligee)
  • An insurance company (the surety)

For example, a client might require you to have a $10,000 surety bond, which you buy from an insurance company. When supply chain issues force you to drop the project, the surety bond reimburses the client for financial losses up to the bond amount.

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What are the different types of construction bonds?

There are several different types of construction surety bonds. They provide guarantees for various aspects of a project, from the bidding process to completion.

License bonds and permit bonds

Construction businesses may need license or permit bonds to obtain a license or a permit, even before they start work on a project. These bonds guarantee that the company will comply with local laws and regulations.

For example, almost all states require plumbers and general contractors to be licensed. As part of that process, they're usually required to buy a bond in an amount specified by the state.

Bid bonds

Contractors and businesses that bid on construction projects may be required to purchase a bid bond. If they win the contract but are unable to take on the project, the client is reimbursed the difference between their bid and the next lowest bid.

Performance bonds

A performance bond, also called a contract bond, guarantees that your construction company will fulfill the terms of its contract. If unable to do so, then the client is reimbursed for any financial losses, up to the bond amount.

Payment bonds

This bond guarantees that all suppliers, subcontractors, and other third parties will be paid for their contribution to a project. With this type of bond, the client knows the project will be completed without any money owed for supplies or labor.

Fidelity bonds

Fidelity bonds, also called employee dishonesty bonds, are one of the key coverages in a commercial crime policy. If an employee at your construction company steals from a client, this bond will reimburse the client for their loss. Clients might require you to secure this bond before allowing your employees on their property.

How much do construction surety bonds cost?

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Construction businesses and contractors pay a median of $8 per month for surety bonds.

Insurance costs for construction businesses and contractors are based on a few factors:

  • Construction and contracting services
  • Business equipment and property
  • Business income and location
  • Number of employees

Other key policies for construction businesses

While surety bonds protect your clients, you still need to protect your own business against common risks. Construction business owners and contractors should consider the following policies:

General liability insurance: This policy can cover expenses related to client injuries and property damage, such as a contractor sued for damaging a valuable antique in a client's home.

Workers’ compensation insurance: Workers’ comp can cover medical costs for work-related injuries. Because it's a hazardous industry, some states require it for construction businesses of any size.

Commercial auto insurance: This policy helps cover costs if your construction vehicle is involved in an accident. It's required for business-owned vehicles.

Contractor’s tools and equipment insurance: This policy helps pay for repair or replacement of a contractor’s equipment and tools if they are lost, stolen, or damaged.

Professional liability insurance: This policy covers professional mistakes and oversights, such as a contractor missing a deadline for a project. It's also called errors and omissions insurance (E&O).

Builder’s risk insurance: Builder’s risk insurance can pay for damage done to a structure still under construction, such as fire or vandalism at a construction site.

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Construction insurance vs. surety bond: What’s the difference?
Construction insurance and surety bonds provide coverage if a dispute arises between your construction business and another party, but the two types of protection function differently.

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Updated: April 29, 2022
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