Cracked: The why and how of performance bonds in Texas

When you are developing your business in the construction field in Texas, you quickly learn that you have to play by many rules. If you are a newbie, it is likely that the amount of licenses, permits, regulations and administrative steps might discourage you. With time, however, it does get easier and your contractor business can flourish if you have accurate information and a spoonful of business acumen. That is why it is important to thoroughly get acquainted with the legal procedures for contractor work – especially if you are taking public work projects in Texas. An important step in the bidding and performing such projects is obtaining the necessary construction surety bonds – and here accurate information comes handy.

Why do I need a performance bond as a contractor in Texas?

First things first: you might wonder what a performance bond is at all. It is a type of surety bond that is required in the State of Texas in the cases of federal construction projects under the Miller Act, public projects over $100,000 for Texas governmental entities and also in private projects when the owner decides he would like to include one. While insurances act as a protection for your business, contract surety bonds are a protection mechanism for the public. As they represent a credit given to your company prior to your actual work, their premium is a safety net, guaranteeing that you will fulfill your obligations under the contract. In case you do not meet the requirements of the contract, a claim can be filed on the bond.

When you bid on public work projects, you also need a bid bond in the beginning of the process. It is a requirement when you are submitting a proposal on a public contract. It is actually a guarantee that once you are awarded the project, the surety bond company will underwrite a performance bond for your work. There is another relevant bond as well – the payment bond, which is often combined with the performance bond as a performance and payment bond. The payment bond is a guarantee that you as a general contractor will pay your subcontractors and supplies for their work on the project.  

How do I get a performance bond?

Obtaining a performance bond happens through using the services of a surety bond agency. Usually the bond price is a percentage of the total contract amount and can be estimated in advance. However, if you are bidding on public works projects in Texas, you actually will not pay anything for the bonding. You will just need to include the bond price in the specifications of your bid proposal. In this way, it will be included in your project costs. This is not a hidden trick – it is a common practice that the bonding costs are covered by the project finances because the government wants to ensure that the taxpayers’ money will not be wasted in case of a contractor’s default.

When it comes to smaller projects below $300,000, the bond price is based solely on the credit score of the contractor. With bigger projects, you need a larger scale surety bond agency, as the underwriting process is more elaborate and will require an increased bond line. Take a look at our video for tips on how to increase your contract bond line, so that you can bid on larger projects.  

Kick starting your business as a contractor bidding on public works in Texas just became easier – you just need to get acquainted with the legal requirements and learn a few shortcuts. And when it comes to getting bonded for your project – once knowing what a surety bond entails, it is wise to use a well-established large-scale surety bond agency.

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