This is a guest contribution from Eric Weisbrot, the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry, he is also a regular contributing author to Construction Executive and the surety bond blog.

Whether new to the construction or a seasoned pro, being a licensed contractor in construction comes with a handful of responsibilities. Not only do contractors need to have their training and skills up to date, they also need to maintain a contractor bond to help protect their customers.

The process of obtaining a contractor bond is not all that complicated, but it can be a costly endeavor for those who are not prepared. Knowing what it means to be bonded, understanding how contractor bonds are priced, and following tips to bring down the cost can be an essential part of maintaining a successful, profitable business in construction.

What it means to be bonded

Many people confuse being bonded with having insurance, and while a contractor bond offers certain protection, it differs from insurance in several ways. Being bonded means that you as the construction contractor hold a surety bond from an agency that is essentially an agreement between three parties: you, the surety agency, and the organization or individual requiring the bond. This agreement states that you will perform the work you promise to customers and job owners. If that work is not completed, the surety agency will pay claims on your behalf to the customer. Unlike insurance, however, you are required to repay the claims against your bond.

A contractor bond is often a requirement to obtain and keep a license to do business in your state. The amount of the bond you need depends on the type of work you do and where you plan to do that work. Based on these details, the cost of a contractor bond can vary significantly from one contractor to the next.

Understanding the cost

Surety bonds for contractors are priced based on several factors, including the following:

  • The total amount of the bond
  • The type of bond you need, such as a performance bond, a construction bond, or a bid bond
  • The history of claims against previous bonds in the past
  • Your personal and business financial history

While the first few components of bond pricing may seem like common sense, the financial history may not. Surety agencies take a close look at your personal credit score and business financials because they are taking some degree of risk when issuing a new or renewed bond. Having a history of claims in the past means you are a higher risk than a contractor with few or no claims. The same is true if your personal credit history or score is low. Having negative marks on your credit, including bankruptcies, court judgments, missed payments, or collections accounts can raise a red flag for a surety agency.

If you do not have the best credit history, there are steps you can take to improve your chances of getting a contractor bond at a lower cost. The tips below provide the steps you will want to take in order to reduce the expense of your contractor bond.

Tips for reducing your bond price

Because surety agencies review your personal credit history in determining how much to charge you for your bond, you can do yourself a favor by knowing what’s in your credit report to begin with. You can check your credit for no cost by requesting copies of your report online. Doing so allows you to see if there are any errors on your report that can be fixed easily, and if negative marks exist. Once you know what’s in your credit report, you can take steps to improve your financial track record before your next bond purchase.

1. Fixing Credit

Having a strong credit profile is necessary if you want to pay the lowest amount possible for your contractor bond. You can improve your credit by making on-time payments to your debts, keeping your credit utilization low, and not taking out too many new accounts in a short period. The stronger your credit score and cleaner your report, the better positioned you are to get an affordable bond.

2. Business Financials

If you have already taken the steps to improve your personal credit, your next best tactic in lowering the cost of your surety bond is organizing your business financial records. Surety agencies want to see that you have a system in place to manage the finances of your business, and documents like your balance sheet, income statement, and profit and loss statement are all up to date and accurate. Having this information ready to provide to your surety agency will go a long way in keeping the cost of your bond down.

3. Picking Your Surety Agency

In addition to managing your personal credit and business financials, selecting the right surety agency for your next bond is crucial. Not all sureties work in the same manner when it comes to contractors who have less than ideal credit. You will want to work with an agency that understands that bad credit and claims happen. These sureties may have special programs for affordable contractor bonds, including partnerships with a variety of bond providers. Having options helps ensure you receive the best possible cost for your contractor bond.

Wrap up

A bond is a part of being a licensed contractor, but the cost of getting your bond does not have to break the bank. Be sure to know where you stand in terms of your credit and business financials, and work to improve these at every turn. Recognize that not all sureties provide bonds at an affordable rate to those with bad credit, and make your selection for your next bond with this in mind. Taking these small steps will help you pay less for your contractor bond.

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