Thousands of licensed construction contractors show up to work each day on public and private jobsites, ready to fulfill the contract. However, there are times when the work is not completed, either due to lack of skill, overextension of the contractor or difficulties with subcontractors or vendors. When jobs are not completed as agreed, a claim against a contractor’s bond may be imminent.

Surety bonds for construction are put in place to help offset this risk of non-completion by contractors, as part of the licensing requirements for working in the industry. While surety bond claims are not necessarily the end of the world for a construction professional, they can wreak havoc on a contractor’s career if they are not managed properly. Here are a few ways contractor bond claims can ruin a business and tips on how to avoid them.

The Cost of a Claim

Construction bonds fall into several different categories, including bid bonds, payment and performance bonds, and construction bonds. Regardless of the type of bond put in place for a business, having a customer make a claim against the bond creates an expensive backlash. This is because contractor bonds are a form of credit extended as the professional or business owner. A surety bond agency provides payment for the bond claim should it be found to be legitimate, but the bondholder is responsible for repaying the claim over time. Because of this structure, bad credit plays a role in how much construction bonds cost initially.

When a claim is made and the contractor is found responsible for not performing the work promised, the contractor can pay a significant amount back to the surety agency to cover the bond claim. This extra expense can put cash-strapped contractors in the hole, financially speaking, and it can be a challenge to dig out of it without taking on debt or closing the business altogether.

Reputation is at Risk

In addition to the financial cost of a construction bond claim, a contractor also puts his reputation at risk when a customer files a claim. A successful claim means that the contractor failed to perform the work agreed to, or the work was completed poorly. New potential customers may ask for bond history before they hiring a new contractor to do a new project, and having a claim can limit a contractor’s ability to bring on new jobs. The unfortunate truth is that it does not matter why the job was not completed as agreed – it only matters that there was a claim in the first place.

Failure to get a New Bond

Even if the financial and reputation costs of having a construction bond claim seem small, construction professionals also face another hurdle once a claim takes place. Getting a new bond in the future, whether for a public or private job, can be a challenge. Surety agencies want to know that they risk they take on with a new bondholder is manageable, and having several claims can make it difficult for the agency to approve a bond application. Without the appropriate bond to maintain the contractor license, a contractor cannot legally take on new customers. Some surety agencies will work with contractors who have a claims history against them, but the cost of obtaining a new bond will be far higher than those who have little to no claims on the books.

To avoid claims against a contractor’s bond, it is important to know the limits on each job. This means understanding the time requirements and budget requirements of each project before committing to a new customer, and recognizing the skills it will take to get the job done correctly each time. Contractors should be selective when choosing a surety agency. A strong surety agency will have a claims team ready and willing to help should a bond claim arise. Each of these factors is crucial to keeping the construction bond claim history to a minimum.