A contractor’s bond, also known as a construction bond, is a type of surety bond that is used in connection with construction projects. Contractor bonds protect against financial losses, disruptions, and various other issues that arise when a hired contractor fails to complete a construction job. They also protect in instances where a contractor breaches one of the legal duties laid out in a construction contract.
In other words, such bonds help to ensure that any money invested into the project will get paid or returned in the event that the work is left unfinished or was done in a poor manner. If such a scenario occurs, both the contractor and the surety bond company (i.e., the company that supplies the surety bond) can be held liable for the damages.
Contractor bonds provide protection for all parties associated with a construction contract. For example, these bonds will allow a person, an entity, a subcontractor, and/or a supplier to collect damages from a contractor who refuses to finish a construction project or fails to do a better job.
The parties who are affected will then be able to submit a claim for the amount of the contractor bond to the surety bond company. If the surety bond company discovers that the claim is sufficient, then they will pay the amount of the claim up to the maximum amount of the bond.
Additionally, the bond also serves as protection for the surety bond company itself. After a surety bond company pays for a claim, they can turn around and ask to be reimbursed by the contractor.
Thus, the main purpose of a contractor bond is to provide monetary protections for the interested parties and to ensure that a construction project is completed in accordance with the terms of a construction contract and the applicable federal or state laws.
When Is a Bond Required?
Although contractor bonds are often confused with a form of insurance, they serve as more of a line of credit to fund a construction project. Many states actually require contractors to secure a contractor bond from a surety bond company. Specifically, these bonds impose conditions on contractors and help to ensure that a contractor is complying with federal and state laws.
In addition, depending on the conditions of a particular bond and construction contract, the bond may also guarantee that the contractor will complete the project in accordance with the terms of the agreement and that they will pay for any subcontractors they hire as well as for various work materials needed to do the job.
According to a federal law known as the Miller Act, a contractor bond may be required if a contractor is doing work for the federal government that amounts to over $150,000. A contractor may also need to obtain a contractor or surety bond if the state in which they are working requires one for the particular construction project that they have been hired to do. Each state has laws that are similar to the Miller Act and which will specify such requirements.
In general, there are three main types of contractor bonds: bid bonds, performance bonds, and payment bonds. The first, bid bonds, refer to surety bonds that may be needed for a contractor to enter the bidding process. The bond protects the person or entity who hired the contractor in case the contractor decides to back out of the project or fails to submit a performance bid after winning the initial bidding process.
The second type of contractor bond, performance bonds, are used when a contractor has won and accepted the bid for a construction contract. Again, this bond may be required to protect the person or entity who hired the contractor from monetary losses in the event that the contractor does not perform in accordance with the terms of the construction contract or does a poor job.
The last and other reason that a contractor bond may be required is when the project calls for a payment bond. The payment bond assures all the interested parties that the contractor has enough funds to cover the costs of their workers, outside contractors, and necessary construction materials (e.g., tools, equipment, supplies, etc.).
How Do I Make a Claim on a Bond?
A person may be able to file a claim concerning a bond if the contractor that they hired fails to perform the legal obligations set out in the construction contract. For example, if the contractor completely abandoned the job or is doing extremely low quality work, then the person who hired them will likely be able to make a claim on the contractor’s bond.
In addition to not performing a contractual duty, abandoning a construction project, and/or for doing a poor job, the contractor must also refuse to either:
- Redo or repair the work that they have already done;
- Complete the project; and/or
- Hire a different contractor or subcontractor to repair or complete the job on their behalf.
Once these items have been established, a person should contact the contractor’s surety bond company for further information. In most cases, the surety bond company will inform the person about which forms they will need to fill out to make a claim on a bond as well as the types of documents they must gather in order to have their claim officially processed.
After a claim has been submitted, the surety bond company will review the content supplied in the person’s documents and investigate the claim. If the surety bond company determines that the claim is legitimate, then they will pay the claimant a sum no greater than the amount of the full bond.
How Much Can I Recover?
In general, a surety bond company will typically pay for any damages suffered as a result of a contractor’s insufficient or incomplete performance. It should be noted, however, that an individual will only be able to collect the amount of damages that is equivalent to the bond.
Any money that is still needed to pay for damages and that goes beyond the amount of the bond will require the individual to file a separate lawsuit against the contractor for breach of contract in order to collect it. Depending on the circumstances and whether the individual wins their case, a court may order the contractor to pay a large monetary damages award to make up for their actions that led to a breach of the construction contract.
Should I Contact a Lawyer about Contractor’s Bonds?
Cases concerning contractor bond issues tend to involve very complex legal matters. Such cases are only further complicated due to their mixed treatment by courts, which can vary from state to state. Therefore, if you are experiencing issues with collecting money from a surety bond company, then it may be in your best interest to hire a local contract lawyer as soon as possible.
An experienced construction lawyer will be able to review the facts of your case, which can help them determine whether the surety bond company or a contractor has committed any wrongdoings. If your lawyer discovers that the company or contractor has violated a law or breached the terms of your construction contract, then your lawyer can advise you on your options for legal recourse, including filing a lawsuit against the company and/or the contractor.
In addition, if you need assistance with a settlement or simply to reclaim your funds, a qualified construction lawyer will be able to guide you through this process as well.
