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Understand How Contract Bonds Work and Why You May Need One

Understand How Contract Bonds Work and Why You May Need One

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Contract bonds, also known as surety bonds, are a way to guarantee a person or business’s performance of a contract. Entities use them to protect from financial loss.

What Are Contract Bonds

According to the US Department of Labor, a contract bond is a type of surety bond. A surety bond is a guarantee of the performance of a promise or obligation. The surety bond is not an obligation; it is a contract that obligates the surety to perform its duties. The surety bond protects the principal by the performance of the responsibilities of the surety.

A contract bond is a type of business insurance that protects a company from any losses from a breach of contract. The process of insuring against a breach of contract is often referred to as “bonding” the company. A contract bond is an insurance policy that protects a guarantor against losses or damages that would otherwise be covered under a contract.

What Industries Use Them

The construction industry relies heavily on surety bonds. Construction companies and contractors need to carry insurance to protect themselves from the many risks they face in this industry. But what exactly is a Surety Bond? Surety bonds are an insurance policy that is written by a company that guarantees a project or event (the “Bond Party”) for a set amount of money (the “Bond Sum”). The Bond Party can be a project or an event, and the Bond Sum can be many different amounts, depending on the company.

Most Common Contract Types

Regarding the construction industry, in particular, four contract bond types are mainly used:

  • Bid bonds: These are bonds that guarantee that you will follow all the terms and conditions of that contract if you win the contract.
  • Performance bonds: They guarantee that you will fulfill all details of your contract and complete the job as agreed.
  • Payment bonds: Payment bonds serve as guarantees that you will remit full payment to your subcontractors and suppliers when they provide you with services or products.
  • Maintenance bonds: These facilitate the assurance that the work done on a project is quality and will last. It is, therefore, a kind of warranty.

Contract Bonds: Why You May Want to Use Them

A contract bond can be helpful to deal with challenges that may arise with different construction projects and stages in your contracting career. Furthermore, bonds may help you promote growth and security for your business.

You Want More Business

It is always the wish of a contractor to win more jobs when you bid for them, but it can seem as though you are up against a lot of competition. However, you can show prospective clients that you are serious when completing the project on time and within budget by using a contract bond. Your income depends on it. Therefore you are more likely to win contracts over those who demand upfront payment.

You Are Financially Responsible

If you promise to pay people on time, more people will want to work with you. In cases where bonded contractors cannot pay subcontractors and suppliers, payment bonds can provide an avenue for those obligations to be paid. Subcontractors and suppliers can also be assured that their payments will be received when a payment bond is in place, along with the owner or developer.

You Want Jobs in the Public Sector

Contracting for the state can provide a serious boost to your business, and a bond is typically required before you can even be considered. Obtaining a performance bond shows the project owner that you are committed to completing the bonded project.

The surety will have the power to take over if you fail to accomplish your obligations. Furthermore, bond specialists, Swift Bonds, note that any Federal job worth over $100,000 will have to comply with the Miller Act, which is in place to establish that a contractor will complete the job successfully. Bonds offer guarantees that an individual will achieve the job outlined in the contract, provided the contract terms are met.

A Job You Are Working on Requires Constant Material Supply

Suppliers are expected to comply with supply bonds. A supplier, subject to the terms and conditions of the bond, is required to provide the supplies, materials, and equipment agreed to be delivered promptly. Supply bonds may reimburse purchasers for losses incurred due to the late delivery of supplies.

Contract bonds are a set of different bonds that main contractors and construction companies use to ensure their work. They are a vital part of this industry and give peace of mind to the client that you as the contractor will do the job on time, on budget, and with no outstanding debts.

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