One question frequently asked by homeowners when interviewing contractors for remodeling or home addition projects is, “Are you licensed and bonded?” When a contractor is “bonded” it can mean several things depending on the state of residence. Because there are so many kinds of bonds, this requirement can be confusing for homeowners. To clarify, here is a quick outline of what you need to know about bonds in relation to remodeling or house additions.
Most home remodeling is done without any kind of bond. There are several reasons this is true:
· Bonds are very expensive to purchase.
· Bonds are only given to contractors who meet a long list of requirements.
· Both homeowners and contractors have learned that bonds are not necessary for a successful project.
License and permit bonds guarantee that the contractor will fulfill local and state requirements in order to get a license or permit.
There are many types of surety bonds. These can be purchased by either the homeowner or the contractor. Surety bonds bought by contractors usually cover several obligations of contractors in a remodeling or house addition contract.
The types of bonds that apply to home additions and remodeling are contract bonds. The surety (usually an insurance company) guarantees to the homeowner that the contractor will complete the work to a given industry standard of quality and that the contractor will pay all suppliers, subcontractors and workers on the job.
The bond is called a contract bond because it guarantees that the contractor will fulfill the terms and requirements of a specific contract. There are four main kinds of contract bonds:
1. A bid bond assures the homeowner that the contractor has a guarantee from a bonding company that the bid on the project is reliable and that the job will be contracted at the price bid.
2. A performance bond is a guarantee from a bonding company that the contractor will complete the work according to the terms of the contract. This includes contract stipulations of time, price, and specified materials.
3. A payment bond is a guarantee that the contractor will pay suppliers, workers and subcontractors. If the contractor fails to do so, the bonding company will pay to complete the job and then obtain payment from the contractor’s assets.
4. A supply bond is a guarantee to the contractor from suppliers and subcontractors that they will supply the materials or complete the work stated in the contract.
A homeowner can also purchase a surety bond/payment bond for a home addition or remodeling project. In this case the homeowner is buying a guarantee from the bonding company that s/he will pay the contractor the entire price stated in the contract for the work performed. This bond gives the contractor financial protection.
The cost of a surety bond/contract bond varies from one state to another, but is usually between 2% and 4% of the total cost of the project. The benefit of a bond is that it offers financial protection to either the homeowner or the contractor.
Bonds have two main disadvantages in connection with home addition and remodeling projects. First, once a bond is signed it cannot be broken. Second, if the contractor defaults, and the surety assumes completion of the contract, the homeowner is not permitted to choose the contractor who will finish the job.
What you need to know about bonds and remodeling is fairly straightforward. Before purchasing any bond for a remodeling or house addition project, it is wise to check state laws to find out if a bond is required of the homeowner or the contractor. If a bond is required, these points should help you understand the basics. If a bond is not required, you can protect yourself with a well-written contract.