Tips For Creating Surety Bond Requirements

Our agency has been getting contacted by numerous government officials as of recent; state, Federal, military, etc. All of them have questions about how to best handle bonding requirements for upcoming government contracts from the upcoming stimulus package. This is not new territory for us, as we have various government departments revise bond forms and create new requirements throughout the years. We expect to hear from many more seeking advice in the coming months. The current stimulus package proposal calls for 180 billion for infrastructure. An investment larger than any other since the creation of the interstate!

The flurry of requests for advice prompted me to compile this list of tips on what government workers need to think about when creating contracts. This post will be updated as more questions come in. Feel free to ask a question in the comment box below or by using our agency’s contact email form. Should you find this page useful, please be sure to create a link to it on your department’s website to ensure it is reviewed by those who need it.

Break Up Large Contracts
It may require a little more work to do, but breaking up large contracts into several smaller ones is a good idea. Doing so allows smaller contractors to get involved, that would otherwise not qualify due to bond line limitations. This means that there will be increased competition for each bid. The recession has hit the balance sheets of contractors throughout the country, often resulting in reduced bonding capacity. Don’t limit your projects to the largest of contractors by not breaking up contracts when possible.

Less Than 100% Requirements Are A Waste
At times, government policies do not meet real world situations. The intentions may be good, but failures to consult industry professionals result in useless or harmful policy. Requiring a bond less than 100% of the contract amount is a prime example (see: FAR 28.102-2). Bonding companies underwrite and charge based on contract amounts, not bond amounts. Therefore, requesting less than a 100% bond only lowers the maximum amount that can be filed for any possible claims. It does not allow for smaller contractors to participate as intended.

Use AIA Standard Forms
A bad bond form can make a contract “unbondable”. Keep in mind, the bond form declares precisely what the bonding company is guaranteeing on behalf of the contractor. Therefore, if they don’t like the terms of it, they will not write it, even if the contractor qualifies for the bond amount. The AIA has standardized bond forms that should be used when possible. Doing so will protect the government from a defaulting contractor properly and ensure a smoother process for all involved.

Do you have questions of suggestions of your own? Please feel free to comment below!