Getting your contractor bonded

Phil Pavarini is a licensed insurance producer and is compensated when a bond is placed through this site. This page is general information, not legal, tax or fiduciary advice, and it is not a substitute for reading your plan document or contract or for advice from your own counsel. Figures shown are current as of the date on this page.

Most homeowners find out what a performance bond is after they needed one. The contractor took a 30 percent deposit, framed half an addition, and stopped returning calls. The lawsuit is easy to win and impossible to collect, because the company has nothing left.

A performance and payment bond moves that risk off you and onto a surety company that underwrote the contractor before the job started. You do not buy it and you do not apply for it. You require it, in the contract, before you sign. That is the whole of your job, and it is the part that has to be done right.

Is it worth it on your project#

Not every job needs one. A bond earns its cost when one or more of these is true:

• The money at risk is large. A $60,000 kitchen or a $400,000 custom home, not a $3,000 water heater. The program minimum is usually a $10,000 contract.
• You are paying ahead of the work. Large deposits and front-loaded draws are exactly the exposure a performance bond covers.
• There are many subs and suppliers. The more parties the contractor has to pay, the more parties could lien your house if the contractor does not. That is the payment bond’s job.
• The job runs long. A contractor that is healthy in March can be insolvent by October. The bond outlasts that.
• You do not know the contractor’s finances. The surety does, or will before it issues anything.

There is a side benefit nobody advertises. A contractor that the surety will not bond has told you something about itself before you signed.

What to put in your contract#

The underwriter reads the contract before anything else. A clause that is vague costs time and sometimes the bond. Make sure the signed contract states:

1. That you require the bond, and whether it is a performance bond, a payment bond, or both.
2. The bond amount, usually as a percentage of the contract price. 100 percent is the public-works standard and a sensible default.
3. Warranty periods, written out, so a warranty failure is a clear contract breach.
4. A liquidated damages amount for late completion, if you want one.
5. Payment terms: the deposit, the draw schedule, and what triggers each payment.
6. A real scope: plans, specifications and a schedule. The bond guarantees what the contract says, so the contract needs to say something specific.

If you have a lawyer, have the lawyer draft this. That is what the attorney guide is for.

Is the bond requirement already in your signed contract? Apply for this bond, or read the full bond details.

Then hand it to the contractor#

Send the contractor to the application with a copy of the signed contract. The contractor completes it, the surety underwrites the business and its owners, and if it is approved the surety provides its bond form. You or your attorney can review that form before the bond issues. The bond is issued naming you as obligee.

Two things worth doing at that point. Get a copy of the issued bond, not a certificate or a letter, and keep it with the contract. And check that the surety is a real, regulated company: the U.S. Treasury publishes a list of surety companies certified to write federal bonds, and any homeowner can search it in a minute.

If the contractor stops working#

This is where most homeowners weaken a good claim without meaning to.

1. Stop paying the contractor. The unpaid contract balance goes toward finishing the job. Money you keep paying a contractor in default is money that is no longer available to finish your house, and the surety will notice.
2. Give the surety written notice of default, following the steps in the contract and in the bond. Written, dated, specific.
3. Document everything. Photographs, the schedule, the last communications, what was paid and when.
4. Do not hire a replacement on your own before the surety has had the chance to respond, unless the bond or an emergency allows it. Acting first and asking later can cost you coverage.

The surety investigates. On a valid default it may fund the original contractor to finish, bring in a replacement, or pay you, up to the bond amount.

Liens, and why the payment bond matters#

Mechanic’s lien laws are set state by state, but the risk is nearly universal: a sub or supplier the contractor did not pay may be able to lien your property, even though you paid the contractor in full. The FTC warns homeowners about this directly. The result can be paying twice for the same work.

A payment bond gives those unpaid parties somewhere else to go. In a few states it does more. Florida, for example, exempts the owner from most subcontractor and supplier liens on a direct contract when the contractor furnishes a payment bond meeting section 713.23 of its lien law and a copy is attached to the recorded notice of commencement. Rules vary by state, so ask whoever is handling your contract how it works where you live.

Lien waivers from subs and suppliers at each payment are still good practice. The bond and the waivers do different jobs.

What the bond will not do#

• It does not cover taste. If the contract was performed and you dislike the tile, that is not a default.
• It does not cover changes you made that the contract never priced.
• It is not liability insurance. If a worker damages your neighbor’s car, that is the contractor’s general liability policy.
• It does not pay more than the bond amount. Which is why the amount belongs in the contract and why 100 percent is the sensible default.

Common questions