Obtaining the required contractor bonds is crucial for contractors. This is especially true for two reasons. For starters, it is a huge part of the licensing requirements. In other words, failure to sort it out adversely affects the chances of being issued operational licenses.
Consumer protection is mostly the basis for this licensing rule. As a result, the required contractor bond has to be secured by contractors who truly represent the consumer’s best interests. Furthermore, it adds a lot of credibility to the business. Some clients would even steer clear of options that do not have this formal document.
Businesses in the construction industry therefore need to understand the processes of applying and maintaining bonds. You will find out about this if you continue reading.
How Contractors Apply for Bonds
There are processes for applying for this formal document. Typically, this is how the process plays out:
Related Posts
Identification
There are various kinds of bonds serving various businesses across various industries. However, the right one has to be obtained. It is only then that licensing and legal requirements in this regard can be met. So, the process starts with these service providers identifying the bond(s) that need to be obtained.
Selection of Surety Company
The services of a surety company are needed for acquiring bond documents. This company even plays a very crucial role in the entire process. As a result, a good surety company needs to be identified and selected.
As the name suggests, this company will be functioning in the capacity of a surety before the issuer of the license law in your location. In other words, it is claiming that you would adhere to licensing laws and that the company can be held financially responsible if you fail to do so.
Speaking of being held financially responsible if claims are filed and validated, the surety would be responsible for facilitating payment. However, this is to the extent of the amount in the bond agreement. Furthermore, the surety would eventually get the money back from the contractor.
Application
The contractor would have to apply to the surety company. Certain details that would be examined would have to be submitted during the application. Some of the information that would be required for the application includes information on:
- Past industry experience
- Financial stability
- References
The submitted details will pretty much center on the aforementioned. You can click here for more on this subject.
Risk Assessment and Surety’s Decision
The surety company would examine the submitted application and make informed decisions based on it. On the whole, the company would perform a risk evaluation of the contractor.
Typically, the areas of concern during this risk assessment process are the qualifications and creditworthiness of the contractor. For the record, the risk assessment carried out is technically known as underwriting. The underwriting process would pay attention to several factors, including the contractor’s:
- Credit History
- Financial Statement
- Project History
- Industrial Capabilities
After assessing, particularly based on the aforementioned yardsticks, the surety company would make either of two decisions. Either the application is approved or denied.
The surety company would come up with a bond quote if the application was approved. This quote will determine how much will be paid in premiums to the company. Usually, this is a percentage of the bond’s amount.
For example, the CSLB (Contractors State License Board) Contractor’s Bond is set at 25,000 dollars as of the time of writing this article. However, the quote by the surety company would only request a percentage of the cost.
Premium Payment
The contractor has to accept the terms in the surety company’s quote. The premium payment comes right after the contractor agrees to the terms.
Issuance
The bond document would be issued after the payment of the premium. This document would include details such as the bond amount, type, and obligations, as well as the parties involved.
Obligee
Several parties are in the picture when it comes to bond agreements. The aforementioned parts of this article have stressed the involvement of – the contractor; who is issued, and the surety company; which issues it.
However, the obligee is another party involved. This is the party to whom the agreement is delivered. In a lot of cases, these are the project owners who have set bond requirements to determine contractors that qualify to handle their projects.
By the way, it is the right thing for project owners to validate the bond agreement of contractors. This is because it speaks volumes about how credible contractors are. For more on the need for project owners to validate bond agreements, you can visit: https://www.contractormag.com/.
Conclusion
Bonds usually have to be renewed after a period. Renewing is pretty much the same as applying. This is besides the fact that the existing relationship with the surety can help speed things up.
However, renewing can get complicated in cases where claims are filed. So, contractors need to do everything reasonably possible to honor the bond agreement and act as professionally as possible.
