LicensE & Permit Bonds
Contractor licensing bonds are put in place to ensure that contractors complete construction work in accordance with the laws of the city or state. This includes adhering to all building codes, paying all taxes that become due and more. Typically, these bonds protect the city, state and any individual who is harmed as a result of the contractor’s noncompliance from financial loss up to the full amount of the bond.
Construction bonds, also known as contract bonds, represent a type of surety bond. They provide a financial guarantee that the bills on a construction project will be paid. The issuing insurance company or bank guarantees the project's completion by a specific contractor. Construction bonds protect the assets of the investor or project owner against shoddy work or non-completion of the project. There are three types of construction bonds: bid bonds, performance bonds and payment bonds.
The bid bond protects the project's owner if the bid is not honored by the principal, such as a contractor. The owner is the obligee under the bond and has the right to sue the principal and the surety (the issuer of the bond) to enforce the bond. If the principal refuses to honor the bid, the principal and the surety (the insurance company or bank issuer of the bond) are liable for any additional costs incurred in contracting a second time with a replacement contractor.
A contractor, or principal, uses a performance bond to guarantee that it will complete the contract in accordance with its terms. If the principal defaults, the owner may call upon the surety to complete the contract. In such a case, the surety will have to hand the contract to a new contractor or pay the costs for the owner to complete the contract.
A payment bond guarantees all payments that are due to subcontractors and others from the principal. Beneficiaries of a payment bond are the subcontractors and suppliers. The owner benefits from such a bond because it provides a substitute to mechanic's liens as remedies for non-payment.