If you are a contractor who wants to get involved in public works, you are likely to stumble upon several administrative hurdles that might be completely unknown to you if you are new to the business. Among the rather exotic-sounding terms that will fly around, you will have to tackle three particularly important ones: bid bonds and performance and payment bonds. Below you will find a 101-guide to these three types of surety bonds, so do not be discouraged by the new terminology!
On surety bonds
When you get in the construction business, you will inevitably learn about contract surety bonds because they are often required to perform work on public projects. A surety bond, in short, is a kind of guarantee that ensures you will fulfill your obligations. For contract bonds, they specifically guarantee your compliance with the clauses of a contract for a public project. The surety bond is a safety net for the public, so it is not the same as the insurance you get for your own business.
Photo credit: Foter.com / GNU Free Documentation License
Bid bonds: why and how?
When you are submitting a proposal for a public contract project, you will be required to obtain a bid surety bond as a first step in entering the selection process. The bid bond is a guarantee that actually, in case you are the company awarded the project, you commit to obtaining another important bond – a performance bond.
…And performance bonds?
Here it gets a bit more complex. Actually, when a surety bond agency is producing the bid bond for your public contract proposal, they have to immediately underwrite the performance surety bond as well because of this interlink between bid and performance bonds. The aim of the performance bond itself is to provide an assurance that you will complete the project according to the contract. Thus, if you don’t complete the project accordingly, the obligee (the entity requiring the bond) can put a claim on the bond, which you are responsible to pay. In this sense, the performance bond is a credit of trust that you obtain prior to performing the work.
What about payment bonds?
A third kind of bond – payment bond – is also being mentioned in the framework of public contract bids. It is a guarantee that within the contract, you commit to pay for the labor of your sub-contractors and the materials of your suppliers. However, this term is usually merged with the performance bond because, in reality, it is a part of you following the contractual agreements. Thus, you almost always need to obtain only a bid bond and a performance and payment bond.
Good news on the costs
Although it would seem quite a hassle to get these three bonds for a public works contract, the costs for your company can be really low. First of all, the bid bond is likely to be about $100 per bid for smaller contractors, and free of charge for larger contractors. And here comes the surprise: what about the performance and payment bonds? If you include your bonding costs in the bid you present, they will be covered by the contract and you would not need to pay anything for it. Thus, it is commonly accepted that the government will pay for this insurance that guarantees that you would follow the contract requirements. You can apply with a surety bond agency and get exact bond costs. Then you can cite these in your bid and – voilà!