As a person who works in the construction or home improvement business, you must have heard the word contractor license bond more than once. But what exactly does it mean? And why does it matter so much to the contractors, property owners and state licensing boards?
Contractor license bond is not yet another paperwork requirement on the list of long. It is an essential safety measure, a guarantee of trust, and a source of protection that preserves the consumers and good and honest contractors. Regardless of the experience, experienced or unexperienced person, knowledge of how the contractor license bonds operate may assist in cultivating a better business with great reputation. Discover more here.
How about breaking it down in simple and easy to understand manner?
What Is a Contractor License Bond?
A contractor license bond is a form of surety bond that most states mandate a contractor have to qualify to successfully run their operations or receive their contractor license. A bond is a protection to the public, the client, and the state unlike insurance that protects the policy holder.
Consider it as a kind of guarantee of finance. By licensing a contractor, the state would like to be satisfied with the fact that this contractor would not violate the law or ignore the building codes and that he or she would adhere to ethical principles. The bond serves as the guarantee.
There are three people involved in a contractor license bond, the principal, the oblige and the surety. A claim can be made against the contractor’s bond if they don’t follow the law or do the right thing, like quitting a job, breaking building codes, or hurting the company’s finances. The claim is paid by the surety, and the contractor then has to pay back the guarantee.
How Does a Contractor License Bond Work?
It’s easy to mix up worker bonds and insurance, but they are not the same thing. When you have insurance, the company pays for losses that are covered. The bonding company only pays for a short time when you have a trust.
You can make a claim if a contractor’s bad behavior causes a homeowner or state agency to lose money. The guarantee pays the person who was hurt up to the amount of the bond if the claim is true. The worker will have to pay the bonding company back after that.
This system makes people more responsible. The bond makes sure that workers are legally and financially responsible for their work and gives customers a way to get their money back if something goes wrong.
Why Contractor License Bonds are Important
License contractor bonds are there for a reason, or more than one reason. They keep consumers safe, make the building industry stronger, and give honest contractors an edge over dishonest ones. This is why they’re important.
They Protect Consumers From Fraud and Poor Workmanship
A lot of people who hire contractors don’t know much about building codes or standards in the business. They trust each other. One of the best ways to tell if a worker is honest and willing to follow the rules is to look at their license bond.
The homeowner can get their money back from the bond if the worker takes the money and then disappears, does illegal work, cuts corners, or breaks state rules. It gives people peace of mind to know they are safe, even if something bad happens.
They Enable Contractors to Operate Lawfully
It is illegal for contractors to operate in the majority of states without first obtaining the necessary licenses, which in turn requires a contractor licensing bond. This changes the bond from an optional requirement to a required one.
Penalties, fines, and the inability to execute commitments in court might result from working without a bond or license. Contractors that are serious about establishing a solid foundation for their company must take the necessary steps to obtain a bond.
They Establish Credibility With Customers
Reliability, transparency, and professionalism are the three most important qualities in a contractor that homeowners and companies seek out. A strong friendship can set you out from the crowd.
Your website, vehicle, or business card should prominently display “Licensed, Bonded, and Insured” to immediately convey credibility. It demonstrates to prospective customers that you value their business, follow all applicable regulations, and are dedicated to meeting their needs.
When applying for jobs in highly competitive fields, this level of trust might mean the difference between success and failure.
They Make the Industry Better Overall
Reputation is crucial in the home improvement and construction businesses. Obtaining a contractor license bond is a good way to protect the public’s trust in the sector from unscrupulous individuals.
Bonds help build a more trustworthy market for customers and contractors by increasing the bar for conduct and quality of work. From first-time homeowners to owners of huge commercial properties, everyone benefits from this.
Also Read: 10 Benefits of Outsourced Construction Accounting for Small Contractors
