Let’s talk about the most interesting one of these ideas: bonding. You often see the phrase “licensed and bonded” on the side of contractor’s truck, but what does being “bonded” really mean and why should you care?
Very simply, it means someone else is willing to step in and cover the costs if you don’t follow through with your commitment. That can mean many different things depending on what you have to be bonded for. The most common bond needed by contractors is a performance bond.
Performance bonds guarantees to the owner of the job that the job will be completed. If the original contractor doesn’t follow through with their commitment (to finish the job), then the bonding company pays another contractor up to the bond limit to come in and finish the work.
Bonds are not insurance. If a bond is paid out by the bonding company, they then have to collect that same amount back from the contractor they originally bonded. This leads to another important question: how do I know how much I can be bonded for?
Bond underwriters are basically looking at their ability to realistically collect that bond amount from you in the event they have to pay it out to a job owner. Therefore if you need a $1M bond for a job, you have to have the ability to access $1M to pay it back. If you need a $1M bond, but only have $20,000 in the bank, own a few trucks, have $250K in debt, and doing about $500K in annual revenue, the underwriter knows he / she won’t be able to collect that $1M from you.
Your financial picture will determine the limit you can be bonded for. Think of it like applying for a loan from the bank. They won’t likely loan more than what they think they can collect from you. In fact it’s usually a lot less.
If you’re still reading this, God bless you. This stuff is boring, but it can be the difference in you bidding and winning a large job or not. Got more questions about it? Contact me so we can discuss. I’ll try to make it sound less like trying to split the atom.
Jeremy Long
205-572-1063
