Commercial bonds and contract bonds are often required for certain businesses to operate in a state or get hired for jobs. This article will discuss the differences between the two and go into more detail about various types of contract bonds.

Key Takeaways

  • The government often requires commercial bonds for an organization to secure a business license.
  • Contract bonds provide a financial guarantee to governments and owners on an underlying contract.
  • There are many kinds of contract bonds, including bid bonds and performance bonds.

What Are the Differences Between Commercial Bonds and Contract Bonds?

What is a Commercial Bond?

A commercial bond is used to ensure that a business or individual follows regulations and acts honestly. The most common reasons for needing this type of insurance are securing licenses, protecting the government from financial losses, and complying with court rulings.

If your industry requires you to maintain a business license, you will likely need to purchase a bond, too. You may have a different license bond for almost every municipality you work in. You can easily obtain the commercial bond you need on our website.

What is a Contract Bond?

Contract bonds are often found in the construction industry. They provide a financial guarantee for construction contracts, including project bids, construction jobs, and goods/service supply agreements. If the contract terms are not met, the wronged party can claim the bond, and the surety company would have to step in.

There are several solutions that the surety can use to rectify the contract. But the surety’s liability is typically capped at the bond penalty. The government and owners of a construction project are the ones requiring contract bonds. Federal government projects valued at over $150,000 require a contract bond. Furthermore, state and local governments often have similar requirements.

Are There Different Kinds of Contract Bonds?

There are several different kinds of contract bonds, each with a specific purpose. They include bid bonds, performance bonds, payment bonds, supply bonds, maintenance bonds, site improvement bonds, and schedule-sensitive subcontractor bonds.

What is a Bid Bond?

A contractor is required to obtain a bid bond before they can submit a proposal for a project. It ensures that the contractor has enough money and resources to take on the job if the project owner awards it to them.

The amount of the bond depends on how much money is being bid for work. The higher the value of the project, the higher the bond amount gets requested. You commonly will see a 5%, 10%, or 20% bid bond requirement.

If the contractor decides they will not sign the contract and are the low bidder, the bid bond guarantees the contractor and/or surety will pay the lesser of the bond penalty or the bid spread between the low bidder and the second-lowest bidder. 

What is a Performance Bond?

Performance bonds provide a warranty if a specific contractor does not meet his contractual obligations. That way, the proprietor is protected from monetary losses.

In simple terms, this guarantees the contractor will perform the work that the contract and the specs outline. If they do not perform as agreed upon, a claim may be filed, and the surety will work with the contractor, obligee, and likely others to fulfill their part of the deal.

What is a payment bond?

A payment bond provides a contract between the proprietor, a specific contractor, and the bond issuer to ensure workers, suppliers, and sub-contractors are paid as they should be without any liens.

What is a supply bond?

Suppliers may use performance bonds, such as supply bonds, to guarantee the procurement and delivery of materials at agreed-upon prices in a contract. Once suppliers default on these contracts, they must compensate project owners according to this agreement.

What is a maintenance bond?

A construction project owner may want a maintenance bond in their contract to protect themselves from faulty workmanship. If something becomes apparent during the covered period, this bond ensures that the defective workmanship will be repaired and compensated for by those responsible via legal action if necessary.

These bonds are not legally required but protect against many defects that would otherwise go unresolved until after damage occurs.

What are site improvement bonds?

Site improvement surety bonds warrant developers that public improvements to publicly owned streets, walkways, etc., be completed per the terms of the underlying agreement. The bond may also include a form of a payment bond that warrants the developer’s suppliers, subcontractors, and labor workers to be paid on time in compliance with regulations and agreed-upon timelines. These site improvement bonds vary depending on whether construction is for new buildings or current construction.

What are contract bond requirements?

A contractor’s ability to obtain a bond depends on their credit, financial standing, character, and work history. This same information will also determine the cost of the bond.

Underwriters for surety providers will request specific information to get a better gauge of the contractor’s qualifications. Underwriters typically request verification, which can include:

  • Financial statements
  • Credit checks
  • Personal financial statements from company owners
  • References from your bank and prior project owners
  • Work in process schedule
  • Other information

Contact ZipBonds to Learn More

Are you ready to get pre-qualified for your contract bond? Simply fill out our quick-start form online, or give us a call at 888-435-4191.

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