The basics of surety bonds for HVAC contractors
HVAC contracting can be a lucrative industry for those who are trained well and have a strong understanding of the components of operating a successful business.
One critical component of being an HVAC contractor is bonding, given the level of responsibility each job brings. Whether it is commercial or residential HVAC work, contractors are required to provide a degree of assurance to their customers that the job will be done correctly and in line with any state or local guidelines and regulations. For this reason, contractor license bonds are necessary. However, understanding the ins and outs of surety bonds can be a bit daunting. Start with the basics to educate yourself on bonds, their pricing and avoiding costly claims.
Basic surety bond terms
A surety bond, also referred to as a contractor license bond, is simply an agreement between certain parties. The contractor, or the principal of the bond, agrees to do the work required of a specific job in accordance with rules and regulations that dictate how that work should be done. A surety, which is the bonding company, guarantees payment to the obligee (the job owner, typically a state or municipality) if the principal fails to perform the work by known standards. The HVAC contractor is then required to repay any claim made against the bond should work not be performed correctly.
Some contractors mistakenly refer to a surety bond as insurance for their work, but that is not an accurate description. The surety agency simply fronts the money needed to pay a legitimate claim, while the contractor is on the hook for repayment to the surety company should a claim go through. Unlike insurance for business or personal needs, bonding is meant to protect the job owner against fraud or faulty work, not the contractor.
In addition to understanding the various players in an HVAC contractor bond relationship, it is also necessary to recognize how bonds for contractors are priced. Each bond provider offers various bonds to contractors, but all are based on personal and business financial history. Claims against bonds in the past, low credit scores, and disorganized business financials highlight a greater risk to the surety company that a claim may be made against a new bond. On the other hand, contractors with a clean credit history, strong income and balance sheets, and few past claims are likely to receive optimal pricing for a surety bond.
Bonds are priced as a percentage of the total amount needed, so HVAC contractors are not required to pay the entire bond up front. Most surety companies price contractor bonds between one to 10 percent of the total amount needed, making it far more affordable for contractors to secure the bond the job requires. As credit improves and business history is strengthened, HVAC contractors will enjoy a lower percentage price for a new bond.
Surety bonds are in place to protect the job owner from work not being performed correctly. When this takes place, the job owner is able to file an official claim with the bonding company against the HVAC contractor. While it is inevitable that there will be an unhappy customer from time to time, avoiding claims is one of the best practices for HVAC contractors to remain eligible for bonds in the future. You should work to avoid claims whenever possible, keeping the following tips in mind:
- Clarify job requirements. Each new HVAC contractor job comes with new requirements and expectations from the customer. It is critical to get as much clarification as possible before beginning any new job so that you ensure the work is being done properly and to the job owner’s standards. Failing to do so may lead to unnecessary bond claims.
- Stay educated and trained – in addition to initial licensing requirements, the best HVAC contractors stay up to date with training and education. This provides a solid foundation for getting new jobs but also completing the work with the latest regulations and standards in mind.
- Document job progress. Preventing unnecessary or illegitimate claims boils down to documentation for many HVAC contractors. Any contact with the job owner, work completed, and progress toward the end goal should be kept in writing or picture form to avoid claims in the future.
- Work toward settlement. In some cases, a claim can be avoided through a settlement with the customer. Instead of filing an official claim with the surety company, the customer may accept payment for the issue. Be sure to get settlements in writing to ensure a future claim is not sought.
Understanding surety bond basics is an integral aspect of running a successful HVAC contractor business. Start with the basic terms, then educate yourself on bond pricing. Finally, work to avoid claims against contractor bonds whenever possible to keep your business up and running.