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Category: Contractor Bonds

The Benefits of Bonding your Construction Project


In the construction industry, there are two important types of surety bonds: contract bonds and license or permit bonds. Within contract bonds, there are three more divisions: performance, bid and payment bonds. It’s important to understand what surety bonds are and the different types within the construction and contractor industry.

Surety bonds are a contract between approximately three parties

Obligee – the one who receives the obligation Principal – the one who performs the contractual obligation Surety – ascertains the obligee that the said principal can undertake the task

It promises the obligee a particular amount of money if the principal doesn’t meet the obligation, like satisfying the terms and conditions of a contract. Surety bond does the obligee from losses that could result if the principals do not comply with the obligation.

Contract bonds, simply put, guarantee the actual performance of a written contract according to its terms and conditions. In performance bonds, a contractor issues a bond to perform a project to specifications stated in the contract. The client would be given compensation for a monetary loss up to the amount issued in the bond if the contract was not completed.

Performance bonds are helpful when bidding or negotiating a construction contract. Many times when bidding, there is a concern of how competent and capable the contractor is to do the work. It can be difficult to properly check a contractor’s financial credentials, especially if there are no assets to satisfy a claim. But a performance bond can provide the security needed. A bid bond guarantees that the contractor with the lowest bid will enter into the contract and provide a performance bond.

Typically, project owners are unaware if the contractor has financial stability and the necessary resources to complete a project successfully. A bid bond provides comfort because of the compensation awarded if the project fails. A payment bond ensures that material suppliers, any subcontractors, and all laborers receive compensation. In contracts over $30,000 with the Federal Government, this type of bond is required. Also, they must be 100% of the contract value.

License & Permit Bonds ensure all required codes and regulations and followed. A California contractors license bond is a commonly required license bond by the CSLB. These are usually established by a government entity like a city, town or state. Often the purpose of these types of bonds is for public safety because it indicates the contractor knows and follows the set regulations.

It is wise to contact the licensing agency to make sure the contractor has the necessary bonds and if any claims are pending against the bond

In conclusion, it’s not uncommon for small issues to arise during construction contracts, and most problems can be resolved without involving other parties. It’s important to identify when a problem isn’t being addressed. If this happens, a thorough understanding of the contract and bond will be the best protection. To learn more please visit a trusting bonding website that reveiw contractor bonds in much more depth. Thanks for reading!

5 Tips on Getting Your Construction Bond Approved

Big construction works are a very risky kind of business, therefore such projects require the individual or construction company to cushion themselves against extreme events which can cause disruptions to the effective execution of the said job. It is very important for a company to show that it is worth to be given a bond for its projects. Below are five tips which can help a construction company to get its bond approved.

1. Give a convincing statement

Regardless of whether your company is financially stable or not, you must clearly demonstrate this to the bonding company. Make sure that your financial statements are complete, honest, clear and accurate. Submit these to the bonding company alongside any other documents as required.  Here is how to prepare a financial statement.

2. Have a strong capital base

Whether a bonding company will give you a bond or not depends on the working capital available. This is defined by the difference between the current assets and current liabilities. Always make sure that your currents assets are readily available and can easily be converted to liquid cash. Bonding companies normally discount riskier assets hence the need to increase collection of receivables and maybe consider replacing a short term loan with a loan term one.

3. Ensure your net worth and profitability is not wanting

Factors such as bonuses and overhead costs affect the profitability of a company, hence the need to make sure that they are well managed as they are a key indicator of the financial stability of your business. Even though bonding companies discount risky assets, it is important to eliminate these from your balance sheet and instead reinvest your profits to increase your chances for bonds. Your net worth is an indicator of your ability to manage losses when they occur hence the need to keep it in check.

4. Keep updates of your work progress

Financial strength is very key when looking for a bond. Aspects such as subsiding of the company’s gross profits during the course of an ongoing project shows inaccurate estimations and poor project management. The estimation should neither be too high as this translates to over billing of projects to compensate the subsiding gross profit or too low leading to cost over runs. Make sure that your estimation and project management process are carefully managed by preparing timely and accurate work in progress reports. This will add bonding confidence.

5. Always have a back up plan

Even though one has laid out plans for their companies, it is important to consider all possibilities which might lead to unexpected bad financial news which is not good for bonding companies. Ensure that you have a succession plan in place and your long term prospects are always strong. Be in constant communication with the bonding company regarding developments or situations affecting your company’s financial performance. This not only increases the bonding company comfort but also indicates your good will hence providing an opportunity to give a turn around strategy to the bonding company

Employment of the above tips will not only help you in getting bond sureties but also attract customers, investors and lenders to your business which will ensure consistent workflow and timely delivery.

Different Contractor Bonds Explained

Bonds are a way of shielding against non-performance of a contractor. It is an assurance to the client that they will be paid in the event that there is non-performance of the contractor. Bonds can be classified into two broad categories, on demand or conditional. It is required of conditional bonds that the client gives proof of non-performance and the resulting loss thereof.

Construction bonds, which are commonly known contractor bonds, are a representation of surety bonds. They offer financial assurance that construction project bills will be paid. The insurance company that issues the bonds or the bank gives guarantees the completion of the project under the commitment of a given contractor. Construction bonds are a protection to the assets shielding the project owner or the investor against poor work or even project non-completion. The following are the three main types of construction bonds: bid bonds, performance bonds as well as payment bonds.

1. Bid Bonds (or tender bond)

The purpose of this bond is to protect the client if the contractor fails to honor the bid. The client is obliged under the bond and has the sole right to take legal actions against the contractor, while the issuer of the bond is bound to implement the bond. In the event that the principle fails in honoring the bid, both the principal and the bank and insurance company (surety/ issuer of the bond) are held liable for any extra costs incurred during the process of re-contracting or re-tendering and consequently contractor replacement.

2. Performance Bonds

This type of contractor bonds is given to contractors to guarantee that they will be responsible for the completion of the project as per the terms and conditions thereof. The client calls upon the surety/ the issuer of the bond to run the project until completion if the principle fails. In such events, the surety re-assigns the contract to a new contractor or even fund the client to be able to complete the project.

3. Payment Bonds

A payment bond is an assurance that all the due payments to the subcontractors and suppliers shall be paid. The immediate beneficiaries of payment bond are providers of raw materials and subcontractors. The client benefits greatly since payment bonds are alternatives to mechanic’s liens as a cover for non-payment.

Eligibility to Construction Bond

Every issuer has its means of determining the eligibility of applicants of contractor bonds. However, by standards, applicants ought to have the right skills, resources and the capacity to execute the contract and comply with the terms and conditions of the contract. An analysis of the financial statements and further investigation of the work history, financial position, and credit rating. The surety performs all these.