What are Surety Bonds?

Construction bonds play a vital role in any construction project. A bid bond is a written assurance from the third party guarantor (generally a bank or an insurance firm) who submits to the customer (otherwise known as the principal) the obligation by the bidder (the contractor) of a submitted bid. It is to make sure that the contractor will enter into a contract, proceed with the contract and will replace the bid bond with a performance bond.

Per law, all bidders are required to submit bid bonds on federal projects. If a construction company wants to have a competitive edge in the industry, it is vital for them to compete for larger projects that require a bid. The bid bond process helps to eliminate unqualified bidders and is necessary for the process of competitive bidding.

A performance bond guarantees faithful performance and completion of a construction project. The critical condition is the need for collateral property or investment to back up the requirements of the surety agency. A performance bond is usually issued by a bank or an insurance company, and the duo act as the “surety.”

A maintenance bond confirms that a contractor will settle any sort of defects or, if they do not, they will then be responsible for compensating the owner for those defects. It is a guarantee against loss due to defective workmanship or materials used in the completion of a construction project.

A payment bond is a three-way contract between the owner (principal), the contractor (obligee) and the surety. It confirms payment for labor and materials used for the project. According to the payment bond, the contractor is obligated to uphold the terms of the contract.

The purposes of a contractor license bond is often misunderstood by construction professionals. Many feel that a contractor license bond protects the contractor. However, the bond protects the general public by ensuring that the construction company will adhere to stipulations found within the bond’s legal language. Once the bond is signed, it makes sure that contractor agrees to work according to certain norms and regulations specified.

• In order to pursue certain opportunities a contractor will need to be “bonded”.
   
• A contractor will seek out the most competitive terms.   This can impact them positively or negatively when it comes to contract award.
   
• Surety bonds help bridge the gap between contractors and project owners. They help to ensure the legitimacy of bidders and qualification of the selected contractor.
   
• Surety bonds ensure that the construction industry meets certain levels of quality and performance. They also help to minimize the risk to project owners.
   

The typical cost for such can be as low as .5% of the contract amount to as high as 4% of the contract value. This is due to several factors, such as the credit worthiness of the construction firm and the amount of bonds they purchase per year.

If a contractor is found to be in default  of the contract, a claim can be filed against them.  Often times the surety will speak with the contractor.  Hopefully, they can come to an agreement about getting things back on track. If this is not possible, then the surety may  take over the project by funding the completion of the work and hiring a replacement contractor.

If a subcontractor or supplier fulfills their contractual obligation and the contractor does not pay them,  they may file a claim. This requires a simple letter to the surety company.  In the letter, the subcontractor or supplier explains their justification for filing the claim. The more paperwork the subcontractor or supplier provides the surety bond producer, the better a surety bond producer can make a decision.

Generally, there are two ways to apply for a construction surety bond:

This is an application which is decided by the determined by the individual’s credit history. A Fast Track application can be used for projects or contracts under $250,000. The fast track application should be submitted with the following items:

• Copy of Contract or Bid Specs
   
• Job Cost Breakdown
   

This can be used for all contracts regardless the size or scope of work. In order to apply for the Bond Kit application, it should be submitted with the copy of contract or bid speculations.

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