In many states, certain types of contractors or businesses are required to be bonded. In instances where the law doesn’t mandate bonds, a customer might require that your company be bonded before hiring you. If you are starting a business, it’s important that you understand the concept of bonding so you can determine whether your work need be bonded for legal compliance, or whether it just makes sense for your business model and customer base.
What is a bond?
A bond (often referred to a surety bond) is a guaranteed agreement that specific tasks outlined in a contract will be fulfilled as promised. Generally, surety bonds involved three different parties: the principal, the obligee and the surety. In this arrangement, the principal would be you as an individual contractor or your business as a whole; in this role you have the responsibility to perform the contractual obligation. The obligee, on the other hand, is the party who is the recipient of your service; this may be an individual whose house you are rewiring or a local municipality, if you are working on a big project. Finally, the surety is the insurance company that backs the bond, providing protection if the principal fails.
What are my options?
There are a number of different types of bonds. Business owners and professionals might consider License, Performance, Bid, Ancillary and Payment bonds.
A License Bond – In many states, government agencies will require commercial bonding of individuals in certain industries. In these cases, the purchase of bonds is necessary before an individual can be legally licensed. This is often the case with contractors, auto-dealerships and even auctioneers.
A Performance Bond – This insurance guarantees the satisfactory completion by a contractor. Many customers, big companies or even individuals, will require this.
A Bid Bond – If your company bids on projects, you may consider (or be required) to purchase a bid bond which essentially guarantees that if you are selected as the contractor, you will complete the project in accordance with the terms at which you bid.
A Payment Bond – This insurance guarantees that you will pay all subcontractors and material providers used during a contract project.
An Ancillary Bond – This bond ensures that requirements integral to the contract, but not necessarily performance related, are satisfied. This may include investigating and complying with special local laws during the completion of the project.
Do I need it?
While it may not always be legally required, obtaining surety bonds for your business may just be good practice. In determining whether it’s the right option for you, it’s important to consult a knowledgeable business law attorney who understands local requirements and will be able to help you effectively plan for the future.