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Contractor surety bonds for construction businesses

Surety bonds act as a contract between a construction business or contractor, a client, and an insurance company. They guarantee the surety company will reimburse the client up to the bond amount if you fail to deliver the 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 surety bond, guarantees that your construction company will fulfill the terms of the contract. If your company is unable to do so, the surety bond claim is paid out to the client as reimbursement 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 have bond requirements, such as a $10,000 surety bond, which you buy from an insurance company. When supply chain issues force you to drop the project, the bond company reimburses the client for financial losses up to the bond amount.

Unlike insurance, this amount must be paid back to the surety company.

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What are the different types of construction bonds?

There are several different types of 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.

Almost all states require plumbers and general contractors to be licensed. As part of that process, they're usually required to buy a contractor license bond in an amount specified by the state. For example, general contractors in California must carry a $25,000 bond or cash deposit in that amount to get licensed.

Bid bonds

Contractors and businesses that bid on construction projects may be required to purchase a bid bond. If they win the construction 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. So if a contractor fails to complete the job, 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 commercial building 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?

Construction contractor calculating insurance costs.

Construction businesses and contractors pay an average of $8 per month for surety bonds.

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

  • The type of construction and contracting services, such as welding, electrical, or appliance repair
  • Type of bond and bond amount
  • Industry risks
  • Your credit score and financial history

Other key policies for construction businesses

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

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

Business owner's policy (BOP): This includes both general liability coverage and commercial property insurance at a discount. It protects against the most common lawsuits and property damage.

Workers’ compensation insurance: Workers' comp pays for medical costs for work-related injuries and illnesses. Most states require this coverage for businesses with employees.

Commercial auto insurance: This type of coverage protects vehicles owned by your construction or contracting business. It typically pays for accidents, vehicle theft, and vehicle damage. If you use your personal vehicle for business, you may need hired and non-owned auto insurance (HNOA).

Contractor’s tools and equipment insurance: A form of inland marine insurance, this policy helps pay for the repair or replacement of a contractor's tools and equipment if they are lost, stolen, or damaged on route to or at the job site.

Professional liability insurance: Also known as errors and omissions insurance (E&O), this policy covers accusations of poor workmanship and oversights, such as a contractor missing a deadline for a project.

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

Contractors pollution liability (CPL) insurance: Also called environmental insurance, this policy covers pollution liability risks for contractors and subcontractors.

Additional insured endorsement: This extends coverage to anyone other than the policyholder, and can be required by project owners, contractors, and subcontractors depending on the project or contract.

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Once you find the right policy, you can begin coverage and get a certificate of insurance in less than 24 hours.

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Updated: December 8, 2023
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