If you are a real estate investor, then you need to make sure that you only ever hire qualified and respectable contractors. Bad contractors can be a nightmare to work with (and can cost you a lot of money).

As an investor, it can be very difficult to know which contractor to choose, especially if you are new to the industry. Thankfully, however, there are some very effective strategies that you can employ to limit your dealings with cowboy builders. One of them is using performance bonds.

This post will tell you how performance bonds can protect you from bad contractors.

What Is A Performance Bond?

Before explaining how performance bonds can protect you from cowboy builders and negligent contractors, let’s first address what a performance bond is. According to the specialists from Axcess Surety, performance bonds are a type of contract bond that guarantees that work will be completed according to the contract held between the construction company and the real estate investor employing them. If the project is not completed to a satisfactory degree (or according to the contract), then the real estate investor can take legal action against the construction company and demand compensation.   

When you are accepting bids on a project, it is important to specify that a performance bond is required. You may also want a bidding bond, which is a bond ensuring that contractors placing bids will begin working on projects if their bids are accepted.

Experienced Contractors

By requiring a performance bond, you will only ever get bids from experienced contractors. Realistically, if a company isn’t confident in its abilities to complete a project, then it won’t take out a performance bond. Contractors who don’t complete projects according to contract or to a satisfactory degree are then required to re-do the work or provide financial compensation. No contractor wants to have to re-complete a job because it can be very expensive. Financial compensation, for obvious reasons, is also not something contractors want to have to give. Because of all of this, only experienced contractors who are experienced will ever consider performance bonds, meaning that by requiring them you will filter out any inexperienced workmen

Trustworthy Companies

Additionally, when you require performance bonds, you don’t have to worry about untrustworthy companies placing bids. The construction industry is swarming with ‘cowboy builders’ who are individuals that take don’t complete jobs properly, take shortcuts, and aren’t trustworthy. No cowboy builder in their right mind will ever consider taking out a performance bond because it will mean that they will actually have to complete jobs properly. Performance bonds, with all of this in mind, will protect you from negligent and lazy contractors.

Financial Protection

Construction jobs aren’t cheap. You will have to pay the construction company that you hire a lot of money, potentially millions of dollars. Whenever a large amount of money is being invested, it is always important to have safeguarding measures in place to ensure compensation if the job isn’t completed properly. A performance bond will protect you and your investment, ensuring that if you aren’t satisfied with the work, you can get your money back, or at least get the job re-done. With performance bonds, losing out isn’t an option.

Legal Protection

In addition to being financially protected, you are also legally protected. In a perfect world, contractors would honor refunds that they are supposed to. Unfortunately, many of them don’t. When you have a performance bond in place, the contractor that you have worked with has no option but to give you a refund or re-complete the work. You won’t have to worry about the contractor being able to worm their way out of completing the work since the bond’s conditions won’t allow for this. With that said, you will still need to enlist a lawyer’s help to get you your money back from them (or to convince them to re-do the job).

Investor Satisfaction

Very few real estate investors work independently. More often than not, real estate investors are part of much larger syndicates. If you are the head of a syndicate, then requiring contractors to take out performance bonds (and also bid bonds) will help to alleviate any concerns that members of your syndicate have about losing their money. A bond will provide them with peace of mind. You should always be trying to satisfy and please your investors, since the happier they are, the more money they are likely to invest.

Performance bonds are a fantastic way of ensuring that you don’t have to deal with negligent construction workers. As was already mentioned, you may also want to request construction companies to take out bid bonds, so that you and your syndicate don’t have to worry about bidders pulling out at the last minute.