What Is a Home Improvement Contractor's Bond?
A contractor’s bond is added insurance that protects your project investment
Highlights
Construction bonds are a type of insurance policy.
Bonds ensure contractors adequately complete their projects.
If the contractor fails to uphold their end of the bargain, the surety company steps in.
Contractors can only be bonded if they have a strong project history.
When researching contractors for your home improvement project, you may have run across the term "bonded and insured”—bonding is a type of consumer protection. Homeowners that hire contractors with a surety company bond can sleep at night knowing that their contractor will complete their home renovation project on time, as agreed, and within their estimated budget. Otherwise, the surety company will have to pay out the difference to the customer or the suppliers, costing the contractor financially and making it harder to obtain future bonds.
How Does a Construction Bond Work?
A contractor has to apply for a surety bond using their company’s legal name, their license number and supply any additional local or state requirements for the area where the work is done. Depending on the scope of the project, the contractor may need to pay a premium to receive the bond. For example, some commercial contractors have to get bonded per job and submit building plans and budgets before being approved.
A construction bond protects a homeowner and other invested parties (like suppliers or third-party contractors) from financial losses that could pop up if something is damaged, incomplete, or if a contractor fails to meet the terms of their contract.
Do Construction Bonds Work?
You’ve probably heard horror stories about half-finished bathroom renovations and kitchen remodels that get slowed down by delay after delay. Homeowners who hire bonded contractors have an added layer of protection against becoming one of these cautionary tales because someone else has to foot the bill if the contractor falls short.
If a contractor fails to hold up their end of the contract and a homeowner files a claim, the bonding company will step in. They may opt to send another contractor out to finish the work or offer a payout to the homeowner. When the bonding company has to do this, the financial burden shifts back to the contractor, who now owes the bonding agent. Construction bonds work by ensuring that even if the contractor fails to uphold their end of the contract, the homeowner won’t be left holding the bag in the end.
Types of Construction Bonds
Surety companies issue construction bonds. There are a few different types of bonds that can be issued to contractors who may want (or need) the added layer of protection for their businesses:
Bid Bond: Used by contractors bidding on big jobs, this type of bond will help cover any losses if the winning contractor decides to withdraw their bid if it’s picked. This can prevent contractors from issuing low-ball bids and then disappearing when it’s time to start the job.
Performance Bond: This type of bond protects homeowners from any breach of contract that might happen if their contractor’s work fails to meet expectations or contractual obligations (e.g., a half-finished bathroom reno).
Payment Bond: Also known as a labor and material payment bond, this type guarantees that the contractor has the financial ability to pay their employees and order supplies.
Who Needs Construction Bonds?
Construction bonds aren’t issued lightly. Surety companies perform extensive background checks and require financial information from applicants before agreeing to cover the contractor and project.
Projects that can benefit from or require construction bonds:
Renovation or remodel projects like kitchen upgrades
If a contractor can get bonded, it means that they have a reliable history and likely a pretty long line of satisfied customers—making them a more solid choice for homeowners looking for extra peace of mind.