Are you protected if the contractor has a payment and performance bond?
I would be willing to bet a majority of people in the construction industry would answer yes without a single hesitation. Owners are willing to bet their own money on these bonds under the assumption it guarantee’s the protection of their project!
I had the same train of thought for years, but now I’m looking at it a bit differently. I still believe it’s a wise idea to require the bonds on the project but that can not be the end of the story. You can not be satisfied with just proof that the contractor has the bonds.
In Nebraska, just like virtually everywhere else, the state requires insurance and bonding companies to be licensed with the state. Unfortunately, the dishonest companies that don’t follow the law have a higher probability of insuring a contractor with a questionable financial situation. One analogy would be how people without car insurance seem to be the ones that cause most of the accidents. Now, if a contractor is having financial problems (also more likely to go out of business), who would possibly sell them the bond? The answer, the “fly by night” bond company that doesn’t care because they will be long gone before anyone realizes what happened. The stakeholders (owners, subcontractors and vendors for example) of the project are then left high and dry.
Even if the contractor is using a legit bonding company, this doesn’t mean it’s a sure thing either. The bonding companies, just like any business, can also go under from having more claims than they can handle financially.
The first step in protecting the project is to have a well written specification that states the bonding company needs to be licensed with the state AND have an acceptable rating (“A” for example). When the contractor submits the bid and/or payment & performance bonds the owner has to spend a little extra time and verify the bond is by a reputable company with an acceptable rating per the specifications. Do not sign a contract with them until they have proven they can meet the specifications in regards to the bonds.
If the contractor is unable to meet the bond requirements, then I would strongly suggest walking away immediately. The possible savings by using this contractor is pocket change compared to the financial risk you are assuming.
