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What Does it Mean for a Contractor to be Bonded?

Contractor Tips , Posted by Nicole Zemaitis on

What Does it Mean for a Contractor to be Bonded?

What Does it Mean for a Contractor to be Bonded?

A contractor has a big responsibility when taking on a project in someone's home or personal business. But, unfortunately, even on the best job sites, things can go wrong.

Someone has to take the fall in the event of property damage, theft, or an unfinished job. To avoid personal financial liability, a good contractor is always bonded and insured.

The same as you would not hire a contractor who is not licensed, top-paying clients will not hire you without proof you are bonded and insured. 

Read on to learn everything about being a bonded contractor and how it can improve your business. 

What is a Bonded Contractor?

Understanding what a bonded and insured contractor is means separating it from what it isn't. 

Between licenses, insurance, and bonds, it can get confusing how exactly these intertwine with each other. So let’s take a look at each of these and explore what they mean for contractors.

Licenses

Every state has different requirements for contracting. Most obligate you to be licensed at the state level. Others only need municipal or county authorization. In general, a job with a budget of over $1500 requires an official license for a legal contract. 

Look up your state's requirements at Contractor Training Center to learn how you can get licensed.

Insurance

An insurance policy protects a business from financial windfalls in the event of workplace issues. Within contracting, there are two types: worker's compensation and liability insurance.

  1. Workers’ compensation pays out to injured employees and provides coverage for lost wages. In addition, no matter who is at fault, workers’ compensation will cover medical bills and even pay out a claim to the family if there is a site-related death.
  2. A liability insurance policy covers property damage caused by a contractor or their employees. But this policy does not pay for lost work or repairs to shoddy work.

Insurance protects the interests of the contracting company and is essential for all businesses to avoid hefty legal payouts. 

Bonds

Bonding is the ultimate safeguard for a consumer. While a relationship with an insurance company makes the contractor feel at ease, bonding will make a client rest easily. 

If a customer is unhappy with the job done or the work is left unfinished, the customer can file a claim against the company requesting compensation. A bond purchased by the company will cover the claim if it is approved and validated by a third party. The primary purpose of bonds is to protect consumers from unethical or ill-advised business practices.

A contractor has options here: a fidelity bond or a surety bond. So what's the difference?

A fidelity bond covers both the company and the client. It protects against theft, malpractice, and fraud. For example, if an employee of a contractor steals from a customer at a worksite, the customer will be reimbursed, but the company is not held accountable for the theft.

A surety bond guarantees the client that all agreed-upon terms and conditions of the contract will be met. When purchasing a surety bond, there are three different parties involved:

  • The Principal, or the company that purchases the bond. I.e., the contractor who will need its services.
  • The Obligee is the party that necessitates the use of a surety bond. Often this is state or county sanctioned, but occasionally it is required by contractors who hire subcontractors.
  • The Surety Company posts the bond. This company is an insurance company that is paid by many contractors.

There are a lot of people involved in this type of coverage, so let's look at an example of how a surety would play out in a real-world situation:

The contractor purchases a surety bond before beginning construction, as is required by either their company or state. For example, they sign a contract with a client to renovate a kitchen. But soon after construction, the tiling begins to fall apart, and the new sink develops a constant leak. The client then files a claim against the contractor, citing shoddy craftsmanship. The surety company then performs an investigation and sides with the customer, who is given monetary compensation through the bond purchased by the contractor. The customer then hires a new contractor to complete the job. 

What are the Benefits of Being Bonded?

While getting bonded financially supports the customer in the short term, it helps your business grow in the long term. Your business will seem more attractive to customers when they know there is a safeguard behind all your work. In the end, you will gain more clients and money than you will lose through buying a bond.

Since the surety is purchased before any work, it also provides a financial cushion for your operations if it needs to be paid out. In addition, the claim will not be an immediate burden to your company since it does not come out of your pocket when a claim is filed.

Being bonded and insured proves you are serious about your business and value trust and transparency. Customers are more likely to have confidence in you when you take the extra mile to protect them with coverage. 

How Do I Get Bonded?

The first step is to contact your insurance agent and determine what level of bond you need to purchase. A good agency will run a background check on you to ensure they are selling to a reputable contractor. There may even be an audit of your financial records to make sure you can afford this investment.

Next, you need to contact your state's licensing department to determine what they require. You cannot buy a bond without being licensed and cannot be licensed without a bond in most situations. Since the two go hand in hand, you must take and pass your local licensing exam.

Finally, you can purchase your surety from the insurance company and take on a job as a bonded and licensed contractor.

Follow these steps, and you will be well on your way to becoming bonded and insured.

If you need extra help, the U.S. Small Business Administration offers grants and loans for independent contractors who cannot afford bonds on their own. The SBA can guarantee up to 90% of a surety's risk.

The Bottom Line

At Contractor Training Center, we have all the information and tools you need to pass your licensing exam. 

Whether you're looking to get your first license or become accredited in a new state, our resources and classes are so comprehensive we can help you pass the exam on your first attempt. 

We also offer consultations to contractors at all stages of their careers, so come to us with all your questions about bonds and getting bonded.

If you want to become a top bonded and insured contractor in your area, you will need to pass the test with flying colors. So reach out to us at the Contractor Training Center today and get studying tomorrow!

Start a course now!