- January 23, 2022
- Posted By:hmvreeland
A California contractors license bond is a legally binding contract that protects the Principal’s clients and the general public. It is typically required to obtain a contractor license. A contractor license bond does not guarantee a contract.
Contractors License Bonds Vs. Contract Bonds
A contractor license bond guarantees that the Principal will abide by the rules and regulations set forth by the state.
A contract bond is also a type of Surety bond that is taken to assure project owners that contracts are fulfilled. If the contracted party fails to fulfill their commitment, the project owner can file a claim with the insurer.
Types of Contract Bonds
A bid bond guarantees the Obligee that the Principal will complete the project at the bid price. The objective of bid bonds is to discourage reckless bidders from entering the bid pool.
A bid bond also guarantees that the Principal will buy any other required performance bonds. A bid bond must be purchased at the initial phase of a project and is required to make a bid.
A payment bond serves two purposes – it protects the project owner from liens and guarantees payments to the contractor’s material suppliers, laborers, and subcontractors. More often than not, a payment bond and performance bond are issued together as a performance & payment bond.
A performance bond assures the Obligee that the contract will be completed according to the terms and conditions set forth in the contract. Performance bonds protect project owners against loss in case the Principal fails to carry out their duties as set forth in the initial agreement between the parties.
Contract Bonds Benefit All Parties
A contract bond benefits both the Principal and the Obligee. The Obligee is assured that they are protected against any losses arising due to the Principal’s incompetence. A bonded contractor has an upper hand over contractors who aren’t when bidding on higher paying projects.
How Does a Contract Bond Work?
A contract bond is an agreement between three parties – the Principal, the Obligee, and the Surety. If the Principal fails to meet their obligations, the Obligee can file a claim with the Surety. Once the Surety receives a claim, they launch an investigation.
If the Surety concludes that the Principal failed to keep their promise, it will compensate the Obligee and later seek reimbursement for the amount paid from the Principal.
Can’t decide which type of contract bond to buy? Let H.M. Vreeland help. We are a leading provider of Surety bonds. With over 100 years of experience, we have the expertise required to help businesses make informed decisions when selecting a bond. To get a quote, call (415) 566-3401.