Licensing, bonding and insurance for business

It is vital that you understand the requirements of licensing, bonding and insurance for your business. This overview is a good guideline, but check with the various authorities in your area, as requirements vary by state and municipality.

Licensing

Licensing your business may be required by your state depending on the trade you perform. In most states, a license is required for the more technical trades, such as electricians, plumbers, HVAC contractors, and fire protection contractors. Other trades, including general contractors, may not need a state license to perform work. Typically an annual fee is required for a license, and an employee of your firm must take a written text to qualify for a state license. If that employee leaves your firm, the license is no longer valid and someone working for your company must take the exam again.

At the local level, licensing requirements vary widely. Each town, regardless of size, may require certain contractors to obtain a local license to work in that municipality. These licenses are usually valid for one year and are not very expensive.

Your local building department will know what state and local licenses you need. Before bidding any job, contact the building department to make sure you know what you will need and what it will cost. The building permit application lists all of the contractors on the project, along with their state and/or local license numbers. Until every firm on the list is properly licensed, they won’t issue the permit and the work can not proceed.

Bonding and insurance

The most common types of bonds are performance and payment bonds, bid bonds and permit bonds.

Performance and payment bonds – When a general contractor is awarded a job, it is up to him to decide which subcontractors have to provide a performance and payment bond. The subcontractor’s bonds give the general contractor a layer of protection, just as his bond helps to protect the owner.

Performance and payment bonds are actually two different types of bonds but are usually referred to collectively. A performance bond is basically a guarantee for the owner of the project from a bonding company that you will complete the project. If during the course of a job, you go out of business, fail to comply with the requirements of the contract documents or get terminated by the owner, the bonding company must step in and finish the project. The payment bond is similar, but it guarantees you will pay the subcontractors and suppliers that provide labor and materials in the performance of your contract.

Work with a knowledgeable bonding agent to establish a relationship with a bonding company. If you don’t know a bonding agent, contact the National Association of Surety Bond Producers at (202) 686-3700 or visit www.nasbp.org to get names of agents in your area. Bonding companies will require you to provide your current and prior three years of financial statements and your current uncompleted work on hand schedule to review your company’s qualifications.

Unlike an insurance company, which does not have any recourse against you after they pay a claim on your behalf, the bonding company will seek reimbursement for any costs they incur to complete your contract or pay your subcontractors. Therefore you must have liquid assets either within your company or personally or you won’t be able to obtain a bond. The cost of these bonds is typically 1.5 percent to 2.5 percent of the contract value.

Bid bonds – The bid bond is usually provided at no cost, but you can’t get a bid bond, if you don’t already have the ability to obtain a performance and payment bond, as described above. A bid bond gives the project owner some protection in the event the low bidder refuses to honor his bid within the allotted time. If this occurs, the bonding company will pay the owner the difference between your bid and the next bidder up to the amount of your bid bond (typically 5 percent or 10 percent of the total bid). The owner in turn can use this payment to offset the cost/time impact of having to re-award the project to another firm.

Your bonding company will need to know the value and description of the project during the bid process, in order to provide the bid bond for delivery with your bid. If the bonding company must pay the owner for a bid bond on which you defaulted, they will seek reimbursement from you.

Permit bonds – The permit bond is a requirement of the municipality in which your project is located. If you fail to comply with the municipality’s construction rules and regulations, they will make a claim against your license and/or permit bond. These bonds are easier to obtain, and don’t require the same financial information as the performance and payment bonds. As the contractor, you are agreeing to comply with all of the rules and regulations of that municipality when you apply for a permit or a license.

Insurance for your business can be very complex. There are many types of coverage – some required by law, some optional. The basic forms of insurance required of most contractors are:

• Worker’s Compensation Insurance provides compensation for medical care for employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue his or her employer for negligence. Coverage A for Worker’s Compensation is typically statutory depending on the state where the policy is written. Coverage B (Employers Liability Insurance limit) is based on requirements in the contract.
• General liability insurance protects your company against bodily injury and property damages suits from third parties for negligence.
• Automobile liability insurance provides liability coverage for any auto owned or leased by the company. This policy also protects the company against auto liability claims made against the company caused by company employees driving their personal automobiles while on company business.
• Excess or umbrella liability insurance is liability coverage over and above the primary liability coverage provided by the underlying general liability, workers compensation and automobile liability policies.

While the types of coverage listed here are the minimum required for most contractors, some projects will require specific coverage limits, as well as other related language and endorsements that your insurance carrier must provide. Send the requirements to your agent before you bid a project to ensure you can comply.

Additionally there are many other types of coverage that a business owner should be aware of such as insurance for Equipment, Employee Dishonesty and Crime, Property Insurance for your building and its contents, Design Professional Liability, Builder’s Risk and Employment Practices Liability Insurance to name as few.

You should consult with an insurance agent to determine what coverage and limits will suit your needs best. Coverage is provided on an annual basis, so you will need to renew coverage each year. It’s a good idea to get at least three separate quotes and compare.

For more information on licensing, bonding and insurance for your business, contact the American Subcontractors Association at (703) 684-3450 or at www.asaonline.com.

–By Bruce Webb, general contractor