Contractor's Construction Bond Guide
There is a variety of surety bonds used to guarantee construction, often required by the government for public jobs. Private entities and general contractors bidding out projects to sub-contractors can also require them.
Construction Bond Types:
- Bid bonds get your foot in the door by allowing you to bid on bonded jobs! They guarantee your bid is accurate (so make sure it is!) and that the bonding company will provide a performance & payment bond if you are awarded the contract.
- Performance bonds are what guarantees your work to the owner. The required "performance" of your work is outlined in writing in the contract.
- Payment bonds guarantee that you"ll pay all sub-contractors, laborers, and suppliers.
- Maintenance bonds provide a warranty on your work for a specific amount of time after the work is complete.
- Supply bonds ensure suppliers deliver materials according to their contract.
Check the job specifications to see if there are bond requirements (public projects usually do).
Obtain a bid bond from your bond agent and submit it with an accurate bid proposal.
Provide your bond agent the bid results, whether you won or not (frees up your bond line).
If awarded the project, request a performance bond from your bond agent.
Complete the work in full (you are responsible for claims).
Once the project is done, close out the job by telling your bond agent it is complete to free up your bond line.
A maintenance bond is occasionally required after you close out the job by whoever required the bid and performance bonds; if needed, get a maintenance bond and make any needed repairs while your bond is active.
Bond lines are the pre-approved amount of contract bonds that you qualify for. Your single limit is the largest bond you can get for a single job. Your aggregate limit is the total amount of bonded work on hand you can have at once for several projects.
Remember, active jobs count against your bond line whether you are awarded projects or not, making it important to tell your bond agent the results of every job you bid on.
A Simple Bond Line Example
Let's imagine you have a $500,000 over $1,000,000 bond line. The $500,000 single limit would allow you to work on jobs no larger than $500,000. Your $1,000,000 aggregate limit would allow you to work on two jobs of $500,000, four jobs of $250,000, eight jobs of $125,000, etc. at the same time.
Subdivision bonds allow developers to make improvements on public property such as roads, sewers and sidewalks. They guarantee the improvements will be done properly.
Do You Need A Subdivision Bond?
The local government will tell you if a bond is needed to perform improvements or additions after you present your site-improvement plans.
Contact a construction attorney and ask the obligee (the one requiring the bond) to withdraw your bid. If the obligee will not withdraw it, a claim will be filed on your bid bond which you must pay, and you will lose the project. Even if the obligee does withdraw your bid, it is unlikely you be able to submit a new bid on the same project.
1-2 weeks if you are a new client, or 2-3 days for current clients. It is crucial to give your bond agent enough time to get you approved. If the bond company does not think a project is a good fit, they may decline you for your own good. However, this can often be worked out with the bond company if there is enough time before your bidding deadline.
There are several reasons including credit issues, weak business financials, little to no industry experience or the bond company protecting you from default if they believe the job is a bad fit.
We have industry standard AIA bond forms on file. However, you must obtain the bond forms from whoever is requiring the bonds (the obligee) if they have their own.
For smaller and mid-sized clients, bid bonds cost about $100 per bid, or about $250 for unlimited bids for the year for; these bonds are free for larger clients.
Performance and payment bonds cost a small percentage of the full contract amount. However, you do not have to pay for them if you include the bond costs in your bid.
Supply bonds cost a small percentage of the contract amount. Maintenance and subdivision bonds cost a small percentage of the bond amount.
Generally only large companies such as Fortune 500 companies or large developers will require contract bonds.
It based on your business financials, industry experience and credit strength. If you have good credit, but do not have strong financials or industry experience, you will likely only qualify for a smaller bond line of about $300,000 and under. If you have good credit, strong CPA business financials and experience in the construction industry, you can get approved for a larger bond line of around $350,000+.
The bond company will pay the claim at first, but you will have to to pay them back. Avoid bond claims by completing jobs in full and according to the contracts.
Crawling with Construction Bonds Before You Run
Learn why you should start with smaller jobs first.
Increasing Your Construction Bond Limits
Learn how to start bidding on bigger projects.
Why Your Personal Credit Matters for Construction Bonds
Will your personal credit prevent you from getting approved?
Types of Work Construction Bonds Can't Be Used For
It's impossible to get bonded for certain job types.
Bid Bonds & Performance Bonds Work Hand In Hand
You can't get a performance bond without a bid bond.
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