Hiring Home Improvement Contractors: Performance Bonds

Hiring a contractor, especially during a time when the market is flooded perhaps with the less-than-experienced and possibly less-competent, is a tricky business. But, one factor that can separate the wheat from the chaff is the bonded contractor, and a surety bond in place to make sure that the work is done to specification.

But, what does that really mean? Kristen Bradley of  SuretyBonds.com is an expert in this area, and she talks here about how to vette your contractor properly in order to protect your property, and your pocketbook.

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Whether you’re building a new home or remodeling your current one, there’s nothing worse than investing in a contractor or construction company that fails to meet your expectations. Once you’re ready to make such an investment, you’ll want to know the contractor that you’re working with will do the job right.

Fortunately, performance bonds can provide you with a financial guarantee of the work that your contractor will do on your house. Performance bonds are valuable resources for any stakeholder who is invested in the housing market, including homeowners, real estate agents, construction workers, bankers and house flippers, just to name a few.

Performance bonds protect homeowners.

Requiring a privately hired contractor or construction company to purchase a performance bond before beginning work on a home improvement project can help you avoid potentially problematic scenarios in the future. With a performance bond in place, you can avoid working with financially unstable contractors who might abandon their work mid-project. The financial guarantee of a performance bond ensures that you won’t be put in a situation where you will have to find — and then pay — additional contractors later on.

The idea behind performance bonds is to protect project owners, such as homeowners and government agencies, from financial loss that results from a contractor’s inability to complete a project appropriately. If a contractor fails to adhere to the contract as outlined in the performance bond, then the home improvement project owner can make a claim on the bond. If the contractor cannot resolve the situation or pay the appropriate reparation, then the surety will be held accountable for finding a solution.

Performance bonds are legally binding risk mitigation tools.

There are thousands of surety bond types out there, and those that function within the construction industry are some of the most used because they provide such iron clad financial stability. Before issuing a bond, surety providers conduct thorough financial reviews of an applicant’s work history and financial records. The surety bond process gives homeowners an additional peace of mind because it assures them that they’ve chosen to work with a professional and reliable contractor that a surety provider has deemed to be financially stable.

Each performance bond that’s issued acts as a three-party contract to guarantee a contractor’s intent to perform assigned duties.

1. The principal is the contractor or construction company that purchases the bond as a financial guarantee that work will be completed according to contract.
2. The obligee is the project owner that requires the contractor to purchase a bond to protect against potential financial loss.
3. The surety is the agency that offers a financial guarantee of the contractor’s work by choosing to issue the bond.

If the contractor does not complete the project satisfactorily, the performance bond allows the homeowner to be reimbursed for financial losses.

Government agencies require performance bonds, and you should, too.

The federally enforced Miller Act requires the use of performance and payment bonds on all publicly funded construction projects that cost $100,000 or more. However, individuals who plan to spend less than $100,000 on a private building project can also protect their investments by taking advantage of the benefits offered by performance bonds. Surety providers not only issue performance bonds for large contracting firms working on federal projects, but also for contractors working on a much smaller scale, such as a home remodel or renovation project. The only difference is the specific obligee that’s choosing to use the bond to their benefit.

For performance bonds to function appropriately, state government agencies require contractors to be bonded before beginning work on construction projects, and homeowners should also follow this practice. Even though you will be requiring a performance bond for a privately funded construction project, contractors will still be able to get access to a performance bond via surety providers.

Find more information about how performance bonds affect the construction industry.

A number of online resources are available to provide consumers with supplemental information on how the surety market affects the construction industry. Most states have detailed surety bond requirements featured on their respective government-operated websites. Local insurance websites are another good place to check if you’re looking for specific details about contract bonds in your area. The Surety Information Office (or SIO) also provides a comprehensive look at how surety bonds affect both national and local construction markets.

Although performance bonds might seem intimidating at first, a little research could go a long way in protecting the investment you’ll make in your next construction project.

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Thanks, Kirsten!

Surety Bonds.com is a leading online surety agency. SuretyBonds.com provides educational resources about the surety industry to to contractors and their clients. To keep up with surety bond trends related to the construction industry, follow the Surety Bonds Insider blog and @suretybond on Twitter.

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TAGS Homeownership and Housing

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The BuildDirect Product Expert Team is here to support any questions you may have regarding your home improvement project.