The owners of contractor companies know little of surety bonds especially if they are start up contractor companies. Requirements are often stated as having to be bonded if you are a contractor. What does it mean to be bonded? What different bonds are available if any and how does one apply for such bonds? All of these good questions will be answered in this posting.

First, there is fundamental terminology that must be understood. Bonds are written if and only if required by another party and involve three parties, thus the bond is a three party agreement. The three parties are the principal, the obligee and the bonding company. The principal is the contractor. The customer requiring the surety bond is the obligee. The bonding company or agent underwrites the bond. A contractor cannot self proclaim to be automatically “Bonded� nor can he obtain a bond just for that reasoning. This misconception is common as the contractor must first qualify for a surety bond and there must be three parties involved. Another misunderstanding is that a bond and insurance are the same. Actually, a surety bond is more to the liking of a form of credit and far from an insurance policy. Underwriting a surety bond is similar to issuing other forms of credit like loans.

Some specific bond types are contactor license bonds and a contract bonds. Contractors are required to obtain one or both of these surety bonds and these bonds guarantee precisely what they are called. A contractor license bond required by the state or local municipality guarantees that the contractor shall operate within the rules and guidelines of the license they hold with that government. A contract bond however guarantees that specific contract. Contracts vary and so does the bonds. The contract bond is one of many bond type categories. There are sub categories for contract bonds. A Bid bond is a subcategory of a contract bond. The bid bond guarantees that if the contractor is awarded the job, he / she will perform at the bid amount and will qualify for the required performance bond. A performance bond guarantees that the contractor shall perform the job cited in the contract. These two contract bond sub category types are the most common in this contract bond category but there are many others and are specific in their nature.

Contractors may also be required to obtain a letter of bonding capacity from their agent. This bonding capacity is similar to a line of credit. The contract bond line has an aggregate limit and single limit that the contractor is held to. For example, the contractor has $250,000 single and $500,000 aggregate bond line. The bond line is a boundary where the contractor cannot accept any single jobs over $250,000 and may not have more than $500,000 of bonded work at any given time. The contractor and producer / agent must communicate well as these bond limits are a vital part of their business. The contractor will make the best use of their surety credit when corresponding well with their producer / agent.

Although the contractor is required to obtain surety bonds, this does not protect him. Contrary, this protects the obligee in this case the government or the party requiring the bond. When a claim is filed, the contractor is responsible for payment. The surety will also seek the principal for any legal fees or fees associated with the claim. As you can see, a surety bond is not an insurance policy.

This should clear up any misunderstandings about contractors bonds and contract bonds. If you are asked as a contractor if you are bonded you can respond with certainty of bond types, categories, sub categories and so on. This will also help when speaking to an agent on obtaining a bond. Your bond producer will ask you questions on what type of business you have and what type of bond you require. Conversations will not be one sided now that you are somewhat educated on contract bonds.