Why Do Contractors Need Contract Bonds?

Published by ajones on March 28, 2019

Protecting Construction Projects From Risk

Construction is a risky business. Economic downturns, labor shortages, material delays, and equipment issues can jeopardize a contractor’s ability to complete a project. This is why contract bonds—also known as construction bonds—are essential for safeguarding project owners and contractors alike.

What Are Contract Bonds?

Contract bonds are a type of surety bond used in the construction industry to protect against disruptions or financial losses if a contractor fails to meet contractual obligations. They come in various forms, including:

• Bid Bonds: Guarantee the contractor will honor their bid and provide the required performance and payment bonds if awarded the job.
• Performance Bonds: Ensure the contractor completes the project according to the agreed-upon terms, or the surety company will step in.
• Payment Bonds: Protect subcontractors, suppliers, and laborers by guaranteeing they will be paid for their services.
• Maintenance Bonds: Cover the cost of maintenance or repairs needed after a project is completed.

Why Are They Required?

Most government projects—and many private ones—require contractors to secure bonds. When contractors bid on a job, they typically must post a bid bond to show they have the financial strength and expertise to fulfill the contract. Once awarded the project, contractors often need to provide performance and payment bonds to protect against potential non-completion or nonpayment of suppliers.

How Contract Bonds Work

In a contract bond arrangement, three parties are involved:

• Project Owner: The individual or entity commissioning the work.
• Contractor: The licensed professional or company responsible for completing the project.
• Surety Company: The bond provider that assumes the financial risk if the contractor defaults.

By shifting risk from the project owner to the surety, contract bonds ensure that if the contractor cannot complete the project or pay subcontractors, the surety will step in to hire a replacement or provide financial support.

Benefits for Contractors

Securing contract bonds isn’t just about meeting project requirements. It also:

• Shows financial credibility and professionalism to potential clients.
• Increases trust among suppliers, subcontractors, and project owners.
• Expands opportunities to bid on larger and more prestigious jobs.

Glenn Insurance: Your Bonding Partner

At Glenn Insurance, we specialize in contract bonds for contractors. With over a century of experience supporting South Jersey businesses, our dedicated experts are here to streamline your bonding process and ensure you have the coverage you need.

Contact our bonding specialists:

• Call us Today: (609) 641-3000, [email protected]

Ready to learn more? Visit our Bonding Services page to explore how we can help protect your business.