Bonded Business Contracts: How Do They Work?
If you work with contracts, trust your name to remain compliant, or bid on projects, then you need to know the difference between contract bonds vs. commercial bonds.
They are fundamentally different products that serve very different purposes. Purchasing the wrong bond could leave you exposed or unable to conduct business altogether.
At Bowthorpe & Associates Insurance Producers, we can help you evaluate your business and purchase the right bond for your needs without leaving any gaps in coverage.
Contract Bonds vs. Commercial Bonds: What’s the Difference?
Contract Bonds
Bonded contracts are backed by and solely applied to one single project. For example, when a home owner hires a contractor to build a house, he or she will ask for a contract bond.
If you purchase a contract bond, you are promising to complete the work on time and up to specifications and pay anyone you owe money to during the project.
If a homeowner files a claim because the contractor was late, did a poor job, or didn’t pay his subcontractors, the surety will step in and pay to have it fixed. You’re still responsible for reimbursing that amount.
It’s pretty straightforward: your ability to perform on one project has a direct impact on your ability to get more work. That’s why sureties take a good look at your history before issuing contract bonds.
Commercial Bonds
Commercial bonds have nothing to do with one specific project. They are usually purchased to keep your business operations running.
A commercial bond ensures that you will stay compliant with laws, rules, regulations, or any licensing requirements.
The main times you will see commercial bonds are when your business applies for any type of license or permit. These are usually required to protect the public or government from your business.
Need a contractor’s license? You’ll probably need one of these. Applying for a dealership permit? Another common one.
Unlike contract bonds that are based on your ability to perform, these are purely compliance-based. If you break rules, don’t perform on your obligations, or refuse to stay compliant with regulations, a claim can be filed against your bond.
The surety may pay it, but you’re responsible for reimbursing the full amount.
Risk Factors
The risk involved with contract bonds vs. commercial just isn’t the same.
Contract bonds cover a specific project, and since the project has a beginning and end date, your risk is also limited. For example, if a contractor performs poorly on a job, the financial repercussions can be devastating. Project bonds are very sensitive to the execution of the work.
Some risks just aren’t as obvious with commercial bonds. You can have an excellent day-to-day business and get hit with a claim for things like improper licensing or breaking a rule you weren’t aware of.
Both types of bonds require you to be financially stable, but each penalizes you for different reasons.
Approval Process
Sureties look at different things when you apply for contract vs. commercial bonds as well.
With contract bonds, sureties are extremely interested in your experience levels and your ability to finish a project. They will look at your history of completed projects along with your financials before approving a contract bond.
Commercial bonds care more about your overall financial strength and creditworthiness. Since these bonds cover general obligations instead of one specific project, underwriters want to make sure you can responsibly run your business.
Of course, if you have solid financials and a clean history, you should see great rates and easy approval on both types of bonds.
Which Type of Bond is Right for You?
If you perform work with a definitive start and end date, contract bonds will become part of your business.
Contract bonds are typically required when bidding on projects. Without one, you’ll be unable to bid much work.
Commercial bonds are needed when you need a license or permit to conduct business.
Your local coffee shop might need one to get a city permit, while a trucking company might need it to earn their license.
It’s common for a business to need both contract and commercial surety bonds. A contractor might need a license bond to operate and then contract bonds to bid on projects.
Knowing the difference can help make sure you have no coverage gaps.
What Happens If I Get a Claim?
Just like with any type of bond, if you get hit with a claim on a contract or commercial bond, you’re on the hook to pay it back.
Contract: A claim can mean that you lose time on a job, incur legal fees, and miss out on future projects because your reputation is tarnished.
Commercial: Getting sued or slapped with a fine can harm more than your wallet. How you conduct your business can also affect how your customers, partners, and the general public perceive you.
The surety company isn’t in the business of just paying out money. They expect you to reimburse them if a claim is filed.
Summary
There is a very distinct difference between contract bonds vs. commercial bonds. One is not better than the other; they’re just meant for different situations.
Contract surety bonds are purchased to guarantee work performance on projects. Commercial bonds are purchased to make sure your business will stay compliant with laws and regulations.
Both are incredibly important, but only you can decide which applies to your business.
Speak to an experienced independent insurance broker at Bowthorpe & Associates Insurance Producers. We can help you determine which bond you need and build a plan to protect your business without unnecessary exposure.
Frequently Asked Questions
What is the difference between a contract bond and a commercial bond?
A contract bond guarantees work performance on a project. Commercial bonds guarantee that a business will remain compliant with laws/rules.
Who needs contract bonds?
Contractors that build projects typically need contract bonds to secure bid opportunities.
Which businesses need commercial bonds?
Businesses that need licenses to operate or must stay compliant with governing rules will need commercial bonds.
Do you need both a contract and commercial bond?
Yes. Many businesses need commercial bonds to obtain licenses and permits, as well as contract bonds to secure projects.
Will a surety bond protect me as a business owner?
No. Bonds are there to protect the client you do business with or the general public. You are responsible for reimbursing the surety company if a claim is filed.