Homeowner Protection BondStatewide in All States

Brief Summary

The Homeowner Protection Bond is a residential performance bond and payment bond for private home construction and remodeling contracts. It puts a surety company behind your contractor's promises. If the contractor walks off the job, fails to build what the contract describes, or leaves subcontractors and suppliers unpaid, the homeowner has a claim against the surety instead of a lawsuit against a small business that may have nothing left to collect. Many surety companies avoid bonds where a private homeowner is the obligee, so contractor performance bonds for homeowners are hard to find. We place them, and construction attorneys can build the requirement right into the contract.

The Homeowner Protection Bond is our name for a contractor performance bond, payment bond, or combined performance and payment bond on a private residential construction contract. The contractor is the principal, the homeowner is the obligee, and a surety company guarantees the contract. The performance bond guarantees the contractor will do the work as the contract requires, and the payment bond guarantees that subcontractors, laborers and suppliers get paid. The contractor applies for the bond at the homeowner's request, and the homeowner must require it in a signed written contract that states the bond amount. Premium generally runs 3 to 5 percent of the bond amount, and projects usually need to be at least $10,000.

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How to Apply for a Homeowner Protection Bond Bond:

• The contractor applies for the bond at the homeowner's request. The homeowner does not apply.
• Homeowner or homeowner's attorney writes the bond requirement and the bond amount into the construction contract.
• Decide whether the contract requires a performance bond, a payment bond, or both.
• Contractor completes the Homeowner Protection Bond application.
• Contractor sends a copy of the signed contract with the application.
• Business, owners and spouses sign the general indemnity agreement.
• Underwriting review of credit, experience and contract terms, then a quote.
• The surety provides its bond form, which the homeowner's attorney can review.
• Premium is paid and the bond is issued naming the homeowner as obligee.

Detailed Information About the All States Homeowner Protection Bond Bond:

What this bond is

Homeowner Protection Bond is our program name. The bond itself is a standard contractor performance and payment bond, the same kind of contract bond used on commercial and public construction, written here for a private home project such as a remodel, addition, new custom home, roof replacement or major renovation. A performance bond and a payment bond are both available, separately or together.

The Congressional Research Service describes a surety bond as a three-party instrument between a surety, a contractor and a project owner. On this bond the contractor is the principal, who buys the bond and promises to perform the contract. The homeowner is the obligee, the party the bond protects. The surety is the bonding company that guarantees the contractor's obligations.

The contractor applies, at the homeowner's request

The homeowner does not apply for this bond. The homeowner requires it, and the contractor applies for it. The surety underwrites the contractor, because the contractor is the one whose performance and payments are being guaranteed.

The surety writes this bond only when the homeowner requires it. A contractor cannot buy one on its own to add to a sales pitch or to win a bid. The requirement has to be written into the construction contract, along with the bond amount.

For homeowners and construction attorneys

If you are a homeowner, put the bond requirement in the contract before you sign it, and say whether you want a performance bond, a payment bond, or both. If you are a construction attorney drafting or reviewing a residential construction contract, a clause stating that the owner requires a performance bond and payment bond and naming the amounts is the first thing the underwriter looks for. The surety provides its bond form, and the homeowner's attorney can review it before the contract is signed.

How the performance bond works

A performance bond guarantees that the contractor will perform the contract in accordance with its terms and conditions, including its warranty obligations. If the contractor defaults, the homeowner gives the surety written notice and follows the default steps in the contract and the bond. The surety investigates. If the default is valid, the surety steps into the contractor's obligations. Depending on the bond terms, it may support the original contractor to finish, bring in a replacement contractor, or pay the homeowner, up to the bond amount.

The homeowner has duties too. The unpaid balance of the contract price goes toward finishing the job, so a homeowner who keeps paying a defaulted contractor, or who has breached the contract, can weaken the claim.

How the payment bond works

A payment bond guarantees that subcontractors, laborers and suppliers are paid for the work and materials they furnish under the contract. If the contractor does not pay them, they claim against the bond instead of chasing you.

That matters more than most homeowners realize. The Federal Trade Commission warns that when a contractor fails to pay subcontractors or suppliers, laws in your state might allow them to file a mechanic's lien against your home to satisfy their unpaid bills. Mechanic's lien rules are set by each state, but the risk of paying twice for the same work is real almost everywhere. A payment bond gives those unpaid parties a source of payment other than your house.

Bond amount and bond form

The application asks for the performance bond and payment bond amounts as a percentage of the contract price, so the contract should state them. On federal construction, the Federal Acquisition Regulation (FAR 52.228-15) sets both bonds at 100 percent of the original contract price, and many private owners use the same standard. On your job, the contract controls. Projects usually need a contract price of at least $10,000.

The surety supplies the bond form. Homeowners and their attorneys can review it before the contract is signed so the bond terms and the contract terms line up.

Why a license bond is not enough

The FTC notes that many states, but not all, require contractors to be licensed or bonded. A license bond, where one exists, is a fixed amount set by the licensing authority and shared by everyone with a claim against that contractor. It is not sized to your project. A residential performance and payment bond is written for your contract alone.

What the contractor needs to qualify

The surety looks for good personal credit for the owners of the business and completed jobs of a similar size. It needs a signed written contract, and purchase orders or work orders are not accepted. The contract must state the bond amount, the homeowner's bond requirement, warranty periods, the liquidated damages amount and payment terms. The business, its owners and their spouses sign a general indemnity agreement. The fewer open questions in the contract about scope and conditions, the better the chance of approval.

A bond is not insurance for the contractor

The surety guarantees the contract for the homeowner's benefit. If the surety pays a claim, the contractor and every indemnitor must repay it, along with its costs and attorney fees. That is why the surety looks hard at credit, experience and the contract before it issues the bond.

What it costs

Premium generally runs 3 to 5 percent of the bond amount. The surety sets the rate from the owners' credit, the contractor's experience on similar jobs and how clearly the contract defines the work. Projects usually need to be at least $10,000. The contractor applies for and pays for the bond, and the contract price can account for that cost.

Checking the surety

Any homeowner can look up a bonding company on the U.S. Treasury list of companies certified to write bonds for the federal government. It is a quick way to confirm the surety on your bond is an established, regulated company.

A clear contract keeps claims fair

A performance bond responds when the contractor fails to do what the contract says. It is not a guarantee that you will like the finished color or style. Detailed plans, specifications, a schedule and written warranty terms protect the homeowner and give the contractor a fair standard to be measured against.

Eligibility and Requirements for a All States Homeowner Protection Bond Bond:

• A written construction contract signed by the contractor and the homeowner. Purchase orders and work orders do not qualify.
• Contract language stating the bond amount and that the homeowner requires the bond.
• A contract price usually of at least $10,000.
• Warranty periods, a liquidated damages amount and payment terms stated in the contract.
• Good personal credit for the owners of the contracting business.
• Experience on completed jobs of a similar size.
• Indemnity from the business, every owner and their spouses.
• The homeowner named as obligee on the bond.

All States Homeowner Protection Bond Bond FAQs:

Official and Additional Resources for the All States Homeowner Protection Bond Bond: