When it comes to the subject of bond requirements, many contractors find themselves in the dark about what it is they’re truly signing up for. Brad Bullerdieck, chief production officer for SuretyBonds.com, spends a lot of time in his role answering questions from confused contractors. Here are some of the common misunderstandings he clears up when it comes to bonding a contracting business.

A BOND IS NOT INSURANCE

Since bonds are sold by insurers, contractors often think they’re buying insurance. That couldn’t be further from the truth. Most contractors buy what’s called a ‘performance bond,’ which is basically an assurance for your customers that says you will deliver the work as promised. If not, the bonding agency (insurer) may step in and pay to remediate the situation.

“It’s more of a personal liability. It may not be legally required in some cases, but you’ll find customers want you to provide it,” Bullerdieck said.

IF THERE’S NO STATE REQUIREMENT, DIG DEEPER

It’s common for a contractor to think if a state doesn’t require a bond, they are free to go about their business without one. However, in many areas of the country, where bonds are not a state requirement, there are bonding requirements at the city, county or township level. And if you work in multiple cities or townships close to one another, each may have unique bonding requirements. Your local or state contractor governing body should be able to help you find which specific requirements your company must meet.

IF YOU USE IT, YOU HAVE TO PAY IT BACK

If you fail to perform and the bonding entity steps in and provides compensation to your customer, you’re not off the hook. You will need to fully reimburse the bonding entity and you may see an increase in your bond price. Again, bonds are there to help the customer and can add to your professional image, but they’re not a free pass.

“I tell people to look at it as being almost like a line of credit. If a claim is valid, you are required to reimburse the insurance company up to the bond amount,” Bullerdieck said.

SEVERAL FACTORS AFFECT PRICING

Most bonds go through an underwriting process, just like a loan, and the owner’s personal credit is the main criterion considered. Good credit helps your rate. Typically, bonds cost between 1% and 10% of the bonded amount. For example, if good credit gives you a 1% rate on a $10,000 bond, your cost is $100. With poor credit, some rates may climb to 6% or 7%, Bullerdieck added.

“Some states, like Arizona, Florida and Texas, pose a flight risk (contractors who abruptly leave the country), so that may be built into the pricing structures in those areas,” he also noted.

Bonds are renewed annually, so if you’ve had a negative credit experience in the past year, such as a bankruptcy, your rate may be affected.

CERTAIN ‘FIDELITY’ BONDS CAN BE MARKETING TOOLS

For contractors, such as painters, who may work inside residences, a fidelity employee dishonesty bond is an inexpensive purchase (usually between one and a few hundred dollars) that some tout in their advertising. The bond protects customers against employee theft and, because claims are virtually nonexistent, rates have remained very low.

“We find that some contractors like to talk about having that protection for customers and it’s good for marketing and advertising,” the expert said.

To read more on the different types of bonds for painting contractors, read the Bottom Line article in the Nov/Dec issue of inPAINT magazine at inpaintmag.com