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The Contractor Bond: When a Handshake Isn’t Enough Assurance

“Word is bond,” the saying goes, but with home improvements, the contractor bond should be in writing. Though you may have gone through the relevant processes to ensure that you are hiring the best contractor for the job, from somewhere like, for example, it is always a good idea to get your agreements and everything else that may need speaking about down in writing to ensure that they can adhere to what they have set out to achieve. In fact, doing this may just be the best thing that you ever decide to do.

What is a contractor bond?

When a contracting company tells you it’s bonded, that means it’s purchased a product, typically from insurance or bond companies, called a “surety bond.” This is a three-part agreement between:

  1. You, as the customer, called the “obligee.”

  2. Your contractor, called the “principal.”

  3. The surety company that issues the bond.

The surety bond is a guarantee that contractors will offer certain services to you, as outlined in the work contract, and if they don’t, you can report the problems to the surety company and get a cash payment.

Different kinds of contractor bonds

Surety bonds have wide application in the business world, but only a few types are relevant when dealing with home improvements contractors:

  1. Performance and completion bonds. These ensure the work will be performed and completed to your satisfaction, as outlined in the contract. As attorney Jack Harari of Weidenbaum and Harari in New York says, if the contractor bungles the job, just walks away from a half-finished job, or even goes belly-up right in the middle, you’re covered. Insist on these bonds for any building jobs.

  2. Payment bonds. These protect you against claims from subcontractors. If the contractor you hired to build a garage doesn’t pay the supplier who sold him the cinder blocks, the supplier will have recourse against the contractor. Why should you even care? Because a stiffed subcontractor could come after you, even if there wasn’t a direct contract with you. These bonds are only necessary if your contractor is making major outlays to other suppliers and contractors.

  3. License and permit bonds. If state authorities require licenses or permits to do business, they may require contractors to purchase these bonds. Provisions may vary from one location to another.

It can be comforting to know that a license automatically means a bond, but don’t assume that these bonds will be enough: They may not have a high enough financial ceiling to cover your job, and they might not include a payment bond for subcontractors.

Read the bond’s fine print

Since each bond’s provisions may vary, you have to sweat the details:

  1. Before any contractors start work, find out who has bonded them and exactly what for. Does the contractor bond specifically cover what is outlined in your contract? Can they show you a “certification” providing they have the bond?

  2. If bonding comes with a state or local license, make sure the contractor’s license is up-to-date. Your town or county may have an online list of local contractors who are licensed, and the builders themselves should have proof.

  3. Never assume, says Wayne B. Heicklen, Co-Chair of the Real Estate Group at New York law firm Pryor Cashman. He advises you to read the financial details of the bond so you know what you’re going to get and under what circumstances.

  4. Don’t skimp! It’s true that premiums for bonds are expensive and as a result, a bonded contractor may charge 1% to 3% more for a project than an unbonded one. But if you go with an unbonded contractor to save a few bucks, you may regret it later. The unbonded contractor may have been unable to get a bond because of past mistakes, just as a driver with multiple moving violations would have trouble getting car insurance from a reputed insurance company (click here for an example).

Nancy R. Mandell is a New Jersey-based financial writer who has worked for On Wall Street and Wealth Manager magazines. A longtime home owner, she has had to work with her share of contractors over the years.

Published on: Mar 18, 2011


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