If you're about to embark on a home renovation project, you're likely far more excited about the final result than the process of getting there. Those planning a large-scale renovation that impacts some crucial rooms (like kitchens and bathrooms) may be concerned at the prospect of living in a construction zone indefinitely--or worse, having to hire a second contractor to complete your project after becoming involved in a dispute with the original contractor. Fortunately, there are some steps you can take to minimize the risk of your project being disrupted or falling too far behind schedule. Read on to learn more about surety bonds in the construction context and how you can ensure you're well-protected before, during, and after the completion of your remodeling or outdoor renovation project.
What do surety bonds do?
A surety bond is a three-party contract designed to provide many of the same protections as an insurance policy; however, it functions a bit differently than an insurance policy by ensuring a trouble-free transition throughout the financing process while also mandating that your project be completed to certain specifications before payment to the contractors can be made.
At their most basic level, surety bonds prevent you from being stuck in a construction zone indefinitely and with no recourse if your contractor decides to bail on you before the project is completed. If the contractor faces problems completing the contract, the surety can step in to assist; if the contractor abandons the project entirely, the surety becomes responsible for replacement.
When a surety bond is executed, it includes three parties: the surety, the principal (generally the contractor) and the obligee (the property owner). In exchange for the contractor's promise to perform in accordance to the construction contract you've signed, the surety (or financial backer) pledges to cover any costs related to or stemming from the contractor's default. This means that contractors with a solid reputation for quality work are able to easily secure a bond at a relatively low cost, while contractors who have already defaulted on a surety bond in the past may find it harder to become bonded.
Which type of bond do you need?
There are three general types of contract surety bonds: bid bonds, performance bonds, and payment bonds. In most cases, homeowners seeking renovations will need performance or payment bonds, as bid bonds come into play only when you're soliciting multiple bids for a project that hasn't yet begun.
A performance bond will protect you from any financial loss if the contractor fails to fulfill the contract terms. Once you've established a breach of contract, you'll be able to enlist the surety to replace the contractor and ensure performance of your contract under its original terms and conditions. A payment bond ensures that the contractor will pay his or her subcontractors, workers, and suppliers--thereby preventing the placement of a construction lien or mechanic's lien on your home if your contractor defaults on payment.
Where should you begin?
Some contractors may advertise that they are "licensed and bonded." If this is the case, you may need only to look over a copy of the surety bond to ensure it adequately protects you in the event of your contractor's default.
If the contractor you've selected doesn't already have a surety bond, you should be able to acquire one through a bonding agency. Some insurance companies, particularly those that deal in construction insurance, will also offer bonding services as well. By talking to a surety agent, like one from NFP, P & C, Inc., before seeking a bond, you should be able to get a better idea of exactly how much protection you need.