A contractor is required to have a license and a bond to start a construction project. In certain cases, such as roadwork or surface projects, a Paving Contractor Bond may be specifically required to ensure compliance and proper performance. But this requirement varies from state to state. In many states, obtaining a license and bond is not mandatory. It is usually mandatory when the project undertaken by the contractor is government or public-oriented.
WHAT IS A CONTRACTOR LICENSE BOND?
A contractor license bond is also called a contractor bond, which usually provides surety to the project owner regarding the ethical compliance of the contractor. A surety bond provides financial warranty to the project owner in case of any default by the contractor. It enables the contractor to operate in a more ethical way towards the project. A contractor bond is considered a broader type of bond because it provides more protection to the public in general. A project can be funded entirely by the government or from the money collected from the taxpayers of any country. So, there must be legal protection to verify whether the money is used for the appropriate purpose.
A THREE-PARTY AGREEMENT
A surety contract is a different type of contract, as it involves three parties to execute a valid contract. The three parties are the obligee, principal, and surety company.
1] OBLIGEE: An obligee is a person who is the owner of the project. Surety bonds provide financial protection to the obligee from the contractor. They are the main party involved in any surety agreement.
2] PRINCIPAL: A principal is a person who agrees to undertake the construction project for the obligee. The principal is contractually obligated to perform their work as per expectations. In the event of any default by the principal, the surety company shall compensate the obligee for the damages caused. Later on, the surety company shall collect the entire amount from the principal for the default caused by them.
3] SURETY COMPANY: A surety company acts as a third party in a bonding agreement. Their job is to execute the bond agreement and collect premiums from the obligee. During an uncertain event, when the obligee is suffering a loss due to the default of the principal, obligated to compensate for the loss.
HOW MUCH DOES A LICENSE BOND COST?
The cost of a license bond usually ranges from 0.5% to 5% of the bond amount. The surety company considers various factors for determining the price of such a bond. The cost to obtain a license bond varies from place to place.
CONCLUSION
A license bond for a contractor is a requirement before starting any project in certain states. This bond covers claims for reasons related to compliance with the law. If the principal is not complying with the rules and regulations, then they will be liable to compensate the aggrieved party for any financial loss suffered by them. The bond claim can be filed by any aggrieved person with the surety company.
