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Construction Bonds

What is a Construction Bond?

  • Contract Bonds and construction bonds are one in the same. A construction bond is just another name for a contract surety bond. Contract bonds include a broader category of surety bonds that can be used in many types of industries. Construction bonds are therefore the types of surety bonds that are commonly used in the construction industry. These bond securities are used to guarantee the performance of contracts and the payment of materials and suppliers.

Types of Construction Bonds

  • Bid Bonds are used as a guarantee that a contractor is able and willing to enter into a contract. A bid bond also guarantees the contractor can and will secure a performance bond and/or a payment bond for the awarded contract. These bonds ensure only serious contractors submit legitimate bid proposals.
  • Performance Bonds are used to guarantee the performance of a contract. Project owners use these bonds to ensure projects are completed on time and on budget. They are required on all federally funded projects as well as most other publicly funded contracts valued at $150,000 or more.
  • Payment Bonds are used to guarantee the suppliers of material and labor are paid. Just like performance bonds, these bonds are required on all federally funded projects as well as most other publicly funded contracts valued at $150,000 or more. Payment surety bonds are more often than not issued alongside performance bonds.
  • Maintenance Bonds are used to guarantee the quality of work on a project. These construction surety bonds ensure repairs due to the use of poor materials or poor workmanship are reimbursed. Maintenance bonds act as a warranty for a certain period of time (usually 1 to 2 years) after a project is completed.
  • Supply Bonds are used to guarantee the correct supplies are delivered on time according to the purchase order. “Supplies” can include materials and/or equipment.
  • Subdivision Bonds are used to ensure contractors will build and renovate the public structures within subdivisions in accordance with local specifications. This includes improvements to sidewalks, sewers, and roads.
  • Site Improvement Bonds are associated with projects that update structures that already exist. They make sure that the improvements agreed upon in the contract are completed to project specifications.
  • Right of Way Bonds can be required by any public jurisdiction which is empowered to issue a permit allowing a temporary intrusion into a public right of way. ROW bonds are usually needed by contractors when the installation of utilities or the construction of driveways and sidewalks relating to a construction project require the closing of a traffic lane or the destruction of road pavement.
  • Contractor License Bonds are required to be posted by contractors before they receive their contractor license at the state, county, and/or city level. They guarantee that contractors follow the licensing laws and regulations that apply to contractors. The contractor license bond is technically a license and permit bond but because they are used by construction professionals, they are often considered a type of construction bond.

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  • Bids bonds cost $100 per year for an unlimited amount of bids. For larger clients, we may issue bid bonds for free.
  • Construction surety bonds cost a small percentage of the total contract amount, usually between 0.5% and 3%. This is known as the premium or the bond rate. It is best practice to include the cost of the bonds in the bid, that way the project owner is technically paying for the construction bonds.

A construction surety bond works just like any other payment or performance surety bond. A project owner (known as an obligee) will require construction companies (known as principals) to submit bids to perform work on a project. Certain projects, mainly publicly funded projects, require bidding contractors to post a bid bond when submitting their bid proposal. The winning bidder would then be required to post a type of construction bond for their part of the project. If the principal completes the project according to the contract then the surety bond will no longer have effect. However, if a claim is filed against the principal then the surety company will investigate the situation. For more information about construction bond claims, please read below.

  • If a claim is submitted on a bond, the surety company will step in to investigate the situation. If the surety company finds that the claim is legitimate or if the principal outright defaults while on the job, then the surety will resolve the issue in one of several ways. The surety company can provide financial assistance to the principal, they can provide technical assistance to the principal, they can hire a new contractor to replace the principal and finish the job, or they can pay the obligee for any damages incurred and leave the obligee responsible for completing their project. The principal would then be liable to reimburse the surety company for the bond claim up to the total surety bond amount, including any legal costs associated with the surety bond claim.
  • Bond claims must be avoided at all costs. If the surety company finds a claim to be legitimate, they will pay the claim. You, the contractor, will then be responsible for paying the surety back - IN FULL.
  • First, review the invitation to bid and any other accompanying project documents to determine if there are bond requirements. Most public work will require bonding.
  • Second, obtain a bid bond from a reputable bonding agent, usually in the amount of 5-10% of the total bid amount.
  • Third, send the bid results to the bond agent. This is important in order to keep an accurate record of the contractor’s bond line.
  • Fourth, if the contractor has the winning bid and is awarded the contract, request a performance and payment bond from the bond agent.
  • Fifth, complete the project in full, on time, and on budget.
  • Sixth, after project completion, notify the bond agent the project is completed. Again, this is important in order to keep an accurate record of the bond line.
  • Seventh, most P&P bonds contain a warranty or maintenance period. If needed, complete any necessary repairs during this period of time. Sometimes a separate maintenance bond or warranty bond may be required.
  • The construction bonding capacity is the amount of bonding that a company qualifies for. This is always in a dollar figure and is explained with two numbers. One, usually the first number, is the single job limit, which is the approved amount for any one single project. The other is the aggregate limit, which is the total amount of bonded work the company is approved to have at any given time.
  • For example, a bond line of $500,000/$1 Million means the company’s single limit allowed on any one project is a maximum of $500,000. While the aggregate limit is $1 Million. So, that would mean the contractor could bid on any one project worth up to $500,000. While at the same time, the contractor could bid and work on up to $1,000,000 worth of projects at any given time. In this example, that could be eight $125,000 jobs, four $250,000 jobs, even two $500,000 jobs, or any combination of jobs that equals no more than $1,000,000.

There are a number of factors involved in determining one’s bondability. In the surety industry, all of the variables fall into three categories: Capacity, Credit, and Character. Together they are called the 3 C’s. Every surety is different and therefore puts different weights on each of the C’s. Luckily The ProSure Group has relationships with over 30 of the largest surety companies. So, no matter what the situation may be, we will be able to help establish a bonding program.

  • Capacity is the measurement of a company’s capacity to perform and it’s financial strength. Capacity to perform is measured by many things including the company’s track record, trade references, organizational structure and reporting, resumes of ownership and key personnel, tools and equipment, business continuation plans, and analysis of past, current, and future projects. Financial strength is measured by analyzing the corporate financial statements, contract schedules, accounting and cost records, profitability trends, cash flow projections, credit references, bank line of credit, and personal and corporate assets. Financial strength is the most important factor used when determining the size of a construction company’s bond line.
  • Credit involves the analysis and review of pay records, vendor trade references, Dun & Bradstreet Reports, personal credit reports, and whether or not the company or any owners have any tax liens, judgments, or bankruptcies.
  • Character is the organizational and owner reputation for fair dealings with project owners, subcontractors, suppliers, lenders and other creditors, as well as the company’s general reputation within the industry. It’s the overall “feel” of a company, its position in the marketplace, its reputation, its direction, and its business plan - essentially character is the company’s ability to carry out its obligations.
  • As mentioned above, financial strength is very important when it comes to determining a bond line. A surety company wants to see how a business handles its various obligations, if the business can continue to handle its obligations, and if a business can successfully handle additional obligations. Simply put, stronger business financials lead to higher bond capacities. When analyzing financial statements, sureties are looking for consistent or growing profit margins, and sufficient equity (net worth), working capital, and cash flow relative to the construction bonding needs.
  • Building bond capacity is obviously easier said than done. This process takes time, start small then work your way up. Begin the process by seeking the professional advice of a reputable surety bond producer that can guide you through the different stages of bonding. Next, start bidding on smaller projects with contracts that are less than $300,000. There are two reasons for this. The first is because projects of this size do not require a review of financial statements but instead only require a credit check. The second reason is because no surety will provide more bonding than that without having an established track record of good performance.

    Next, after having gained experience and a good record of performance by completing a few smaller projects, you must hire a construction CPA to prepare your corporate financial statements. Once your bond agent feels the statements are sufficient for larger jobs they will then submit the documents to a surety for underwriting. If your agent did their job correctly then the surety will approve an increase in the bond line. This cycle then continues. As you complete more projects and build your financials, they are submitted for review and your bond line increases, allowing you to bid on larger projects as well as giving you the ability to work on a greater amount of projects at once.

  • Depending on the size and complexity of the bond needs, it is important to know that it may take some time when establishing a new bonding relationship. In some cases, your bond request may be handled and approved the very same day. In other cases, more information and data may be needed for the benefit of all the parties involved in the bonded agreement in order to move things forward.
  • As a seasoned surety bond-only agency, The ProSure Group has streamlined this bonding process and enjoys the support and great relationships of many of the finest surety insurance companies in the world. In addition to our experience, we have:
    • Specialized programs for many industries and classes
    • In-house underwriting and authority
    • Over 23 years of building very solid relationships with over 30 surety insurance carriers
    • All of these features allow us to respond quickly to a bond application's needs with a viewpoint from an extremely large and diverse cross-section of the surety industry.
  • For smaller contractors, or for those newer to bonding, with smaller project sizes we have an Express Surety Bond Program available. Since this program only requires a credit check, we can often issue these performance bonds in 24 hours or less, although at times it could take a couple of days. This program is intended for projects of up to $350,000.
  • For larger contractors with projects greater than $350,000, the bonding process could take longer than a couple of days. Larger projects inherently bring much more risk to the table. Because of this additional risk, sureties have a strict underwriting process that requires a significant amount of information, including some very private and personal information. This is a very important time to consult with your surety bond agent. Your bond agent will have a list of items needed to establish a surety relationship and will advise as to how those documents and information should be presented. In some cases, not all contractors are ready to be bonded and may need to work on structuring their financial statements or gaining more industry experience. Speak with a surety expert today, we suggest starting this relationship now rather than later, and before bidding on projects that require performance bonds.
  • Getting bonded with bad credit is possible, it all depends on what created the bad credit and the size of the bond. Smaller construction projects, usually those worth less than $300,000, are based solely on the personal credit of the applicant. Minor credit issues such as a few late payments are not usually a problem. However, serious credit issues such as bankruptcy, past due child support, tax liens, civil judgments, or consistent late payments are, and will prevent one from getting bonds.
  • Those with serious credit issues can obtain bonds for larger projects as long as the construction company can provide strong financial statements and extensive industry experience. The strength of the company’s financials and the strength of the company’s industry experience must outweigh the weaknesses of the credit file. The company must demonstrate that it has completed projects of similar size and work without issue and will continue to be able to do so.
  • Why does personal credit matter? Personal credit matters because it is an objective assessment of how an individual handles their personal financial responsibilities. Furthermore, personal credit is often a reflection of how an individual conducts their business and handles their business’s financial responsibilities.
  • Indemnity agreements are required because they obligate you, the contractor, to repay the surety for any losses the surety pays out on the bond. All sureties require some form of indemnity. Most will require full corporate and personal indemnity of all of the owners and their spouses. However, in certain situations, although rare, the specific terms can be negotiated. Sureties will sometimes allow for certain assets to be excluded from the indemnity such as jewelry, family heirlooms, and other unconventional types of assets. Some surety companies may even allow a limit on the personal indemnity to a certain degree, again this is very rare. Furthermore, this is only in the circumstance that the company has sufficient assets in place to back the surety's’ obligations, and even then it may not be a possibility. There is a zero percent chance of a surety fully or even significantly waiving personal and/or corporate indemnity. The surety has a lot on the line when they write a bond, they need to know that the owners running the construction company also have some skin in the game.
  • Why does my spouse have to sign the indemnity agreement? Spouses are required to sign indemnity agreements because the personal assets of married business owners are jointly owned with their spouse. Sureties seek maximum protection in the event it pays out a loss on the bond, therefore spouses are required to be a part of the indemnity. That way a business owner can’t transfer any of their assets to their spouse to avoid paying the surety after a claim.
  • Why do affiliated companies need to sign the indemnity agreement? Much like spouses, every company affiliated with the construction company and its owners are required to sign an indemnity agreement. This is for the same reason as spousal indemnity - surety companies seek maximum protection in the event it pays out a loss on a bond. By having affiliated companies sign the indemnity, business owners can’t transfer or hide assets to avoid paying the surety after a claim.

There are many reasons as to why a surety company might decline a contractor. Some of the reasons include weak business financials, a lack of industry experience, or credit issues such as defaults, liens, judgments, or bankruptcies. A surety may also decline to offer bonding to a construction company that has previously had another surety pay a claim on their behalf.

If surety bonds are required, most contract packages will include the obligee’s surety bond forms. It is extremely important to review these forms as not all surety bond forms are the same. If possible, The ProSure Group recommends using bond forms provided by the American Institute of Architects (AIA). AIA bond forms are industry standard forms that were created in collaboration with a number of industry professionals including contractors, attorneys, surety bond producers, engineers, and insurance agents to represent fair and balanced interests for all users. The ProSure Group has the AIA A310-2010 Bid Bond and the AIA A312-2010 Performance Bond and Payment Bond documents on file for your use.

Project owners, called obligees, require contractors to post surety bonds. In the private sector this is optional, but recommended, and solely based on the discretion of the obligee. In the public sector contract bonds are required by law. The Miller Act requires a contract bond on all federally funded projects valued over $150,000. Most states and local municipalities have enacted similar laws that require contract bonds on publicly funded projects valued over certain amounts. These state and local laws are known as Little Miller Acts.

There are a few types of work that surety companies in the United States won't write bonds for. In most cases, the types of work involve too much risk and are just plain unpredictable.

  • Jobs on Native American reservations are one type of work that most surety companies avoid. This is because the laws on reservations differ from those of the Federal and state government’s laws. Since these laws are unfamiliar to the surety they would rather stay away rather than risk being legally liable to pay any claims that may arise. Surety companies will, however, write bonds for businesses that are owned by Native Americans as well as provide bonding on projects owned by Native Americans. The issue at hand is the location of the project and which jurisdiction it falls under, i.e. Federal, state, or Native American law.
  • Overseas projects are another area of work that doesn't interest U.S. sureties. This is for much of the same reason as for why they won’t write bonds for projects on Native American reservations. Laws are very different in other countries and most other countries use surety bonds sparingly. Therefore, sureties see it as in their best interest to refrain from these projects. U.S. bonding companies will write bonds throughout the United States and its territories including Puerto Rico, Guam, Northern Mariana Islands, the U.S. Virgin Islands, and American Samoa. Bonds are also written for projects conducted on U.S. government-owned property and land overseas such as U.S. military bases.
  • Private home projects are also types of work most sureties won’t bond. The only exception to this is if the government is funding the building or remodeling of a home or homes. Sureties definitely will not write a bond to cover the installation of a new roof or the remodel of a bathroom in a private house.
  • As surety bond experts in business in Florida since 1993, The ProSure Group has issued many thousands of construction bonds and has partnerships with more than 30 of the nation’s largest surety companies. From day one The ProSure Group has specialized in providing surety bonds for the construction industry. This ensures that we match you with the best surety to fit you along with the best, most competitive pricing and terms available in the marketplace.
  • Not only can we provide you with all of your bonding needs at low prices, but we can also say that with our assistance we can help you increase your bonding capacity and in turn help you grow your business. If you have any questions please do not hesitate to contact one of our construction surety experts at our toll-free number 1-800-480-3883 or email us at contractbonds@prosuregroup.com.

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