Many states and cities require licensed construction contractors to procure a surety bond to help protect their customers against less-than-professional work. A surety bond works as a type of insurance by protecting the customer from the financial burden of bad business practices. When a customer does not get the work that was promised by a contractor, they can make a claim against a surety bond to help cover any losses they incur.
Whether you work in residential or commercial construction, a surety bond can be a valuable tool. For any variety of reasons, including overextension, financial issues or a lack of expertise in a specific trade, contractors may fail to perform the work they promised. A customer or the state can then file a claim against a bond, which can cause damage to the business in several different ways.
1. Increased Cost
A surety bond is an agreement between you, the surety agency and the organization or person who requires the bond to ensure they will receive the level of work you promised. When that doesn’t happen, a customer or the state files a claim with the bond company to reclaim losses they may have experienced. While the surety bond agency who provided your bond pays the claim amount, you are required to pay this back over time. The financial burden of repaying a bond claim can be a challenge to overcome, especially if the claim amount is significant.
If you are working to repay a bond claim, it may be difficult to keep up with other personal or business financial obligations. Paying overhead, vendors, subcontractors, insurance premiums and your own living expenses could become challenging in this situation. Compounding the problem, you could face credit issues, or even bankruptcy, due to missed payments. These financial woes inject stress into both your personal and business lives. For these reasons, avoiding claims is necessary to keep you afloat.
2. Higher Risk Profile
Another way surety bond claims can wreak havoc is the potential obstacles they pose when you attempt to procure a new bond in the future. Whether your work requires a performance bond, a bid bond or a general construction bond, surety agencies are likely to think twice about offering an affordable option when you have a history of claims. If you are able to obtain a new bond when your renewal comes around, the price you pay for the bond may be far higher than you anticipated.
Surety agencies take on a certain degree of risk when providing a bond to a construction contractor. They evaluate your personal credit, your business financials and your claims history to determine how much of the total bond amount you pay. Even if your credit history and business track record are strong, claims against a bond will bring the cost of your new bond up over time—another reason to keep your claims to a minimum when possible.
3. Tarnished Reputation
Aside from the financial burdens of a claim against a construction bond, your business reputation is likely to take a hit. While a bond claim may not be made public, a customer who brings a claim against you was dissatisfied with the work you completed, so they are likely to leave a negative review of you or your business when this takes place.
Jaded customers may also spread the word about their experience with you and your business, making it difficult to get new work in the future. When your reputation is tarnished, you may find it difficult to get new customers, which then leads to reduced revenue for your business, making it difficult to maintain payments to your bond for the claim. Thus, more financial issues are created for you immediately and long term.
Having claims against your bond as a construction contractor is something you want to avoid, if at all possible. However, this does not mean ignoring the issues you faced with customers or job owners. Instead, it entails owning up to the fact that their claim may be legitimate and then working with your surety agency to resolve the matter quickly.
Your surety agency should have claims specialists who help you navigate the process from start to finish, offering solutions to help you avoid or minimize claim damages to you and your business. A claim against your bond is not the end of the world, but you should prepare to cover the increased cost of doing business; provide proof that you are a good candidate for an affordable bond when your renewal comes; and make right any wrong experienced by the customer.