Deciding How Much Bond Coverage You Need

If you provide a contracted service, clients expect you to finish the work on time. They also expect you to do the work correctly and for the project to function efficiently.

But, what if you can’t complete the work? In these cases, many businesses purchase surety bonds. These bonds guarantee clients that the company will complete the work. If they don't the company will compensate the client.

How Bonds Work

If a company fails to meet its contractual obligation to a client, the client can file a claim on that company’s bond. The bond will then guarantee the client compensation for the unfinished work, up to the price of the bond.

Should a company carry a $100,000 bond, the company would then have to pay the client up to $100,000 for the incomplete work. These bonds help protect both the customer and the business by guaranteeing the work will finish as promised.

Getting the Correct Bond

Many businesses carry bonds, either by choice or by law. Clients often require prospective contractors to carry these bonds. Some clients may even deny contracts if a company doesn't carry bonds.

If your business needs a bond, you may wonder how much coverage you need on the bond. Consider the following:

• The Size of Your Business Assets: Don’t overvalue the size of your assets on hand. If you buy a bond that is too big, you may wind up having to pay a client more than the business can actually afford. Buy enough coverage to protect the project. But, don’t buy so much that your business will unduly suffer if you have to compensate the client.
• The Cost of the Project: It is always a good idea to buy a bond that covers the total projected cost of a project. Clients want assurances that they can regain some or all lost funds in case a project fails.
• The Cost of the Bond: Bond prices vary. Most bonds usually cost a certain percentage of the bond total, plus other factors. A $200,000 bond may cost one percent of the total. The bond’s premium is therefore $200. The business has to pay that premium to maintain the bond. Again, it is important to strike a balance between price and coverage. Don’t buy so much coverage that you waste money paying for insurance.

When buying bonds, consider their importance to projects, and meet the obligations of the client. Make sure you do your work appropriately so you’re at very little risk of having to pay a bond claim.