Getting a surety bond, and maintaining one, is not always a straight forward and easy process. Here are three aspects that cause the most problems for construction surety bond seekers, and those who have these types of bonds in force.
Inability to get bonded
One of the biggest bonding challenges contractors face is getting bonded in the first place. There are two types of surety bonds for construction — contractor license bonds and contract bonds. As a traditional license and permit surety bond, contractor license bonds are fairly easy to obtain, but contract bonds are another story.
Also called construction bonds, contract bonds are required by private construction project owners and/or developers. Typically, these project owners/developer dictate what kind of contract bond is required (bid bond, performance bond, payment bond, etc.) and in what amount. Because these bonds are considered riskier than regular license and permit bonds — and because they are often multi-thousand (and even million) dollar bonds — qualifying for a contract bond can be tricky.
Although different surety underwriting companies require different criteria, the general rule of thumb is that a bond-seeking contractor must have a good credit score (at least 680), a positive work history, solid financial credentials and previous bonding history. It’s difficult to obtain a contract surety bond without meeting these qualifications, and — most of the time — no bond means no work.
Changing legal regulations
Contractor license bonds are required by individual states and must be posted by contractors who wish to obtain a license to work. Depending on the state, these bonds are issued for specific terms, ranging from one year to as many as four years. But, what happens when legislation surrounding a bond changes — especially midterm?
Changing regulations can throw a monkey wrench into a contractor’s existing surety bond and license. Luckily, keeping track of your state’s licensing and registration regulations is easy. To start, visit the website of your state’s contractors licensing board. Most states — like California — have a section dedicated to bond requirements. If you can’t find this information online, call the department to speak with someone directly. Working with a reputable surety bond agency will also help to limit confusion when it comes to figuring out what bond you need and in what amount, as well as how to complete the bonding process error free.
Similarly, an expired bond can also complicate a contractor’s ability to work. Why? Because more often than not, an expired bond is accompanied by an expired license. Typically, renewing a surety bond is a fairly simple process, but the entire bonding and licensing process must start from the beginning if the bond does indeed expire. When a contractor’s bond expires, the state the contractor is licensed in is notified. Often, getting another bond and license can prove to be more difficult once this occurs.
Working with a reputable bonding agency that reminds clients when their bonds expire is a good precautionary measure to take to prevent this from happening. Keeping up with your city or state’s construction industry’s new developments is also helpful.
Of course, not every obstacle is foreseeable — especially when it comes to bonding. Still, staying up-to-date on what’s happening within your local construction scene goes a long way. To prevent trouble when applying for a bond and a contractor license initially, understand the bonding process as best as possible. As a business professional, knowledge is power when it comes to knowing what’s required of you and what regulations you must adhere to remain in compliance with the laws of your state and industry.
Sara Aisenberg is the director of educational outreach at SuretyBonds.com. Through her work, Sara helps professionals of all types understand the bonding requirements for their specific states and industries. You can keep up with Sara on Google+.