Viking Bond – Contractors Bond Guide: A Surety Bond Guide for The Construction Industry

Overview:

In many states, from the day contractors receive their licenses, they have to be bonded. They must also secure surety bonds for many projects they take on.

 A Surety Bond Guide for The Construction Industry

This guide will serve as an introduction to what kinds of surety bonds you will need as a contractor, when you will need them, how much they will cost, why you need them, and how to get them.

First, we’ll give an overview of what a surety bond is, who is involved, who is protected, and what happens in the event of a claim.

What is a surety bond?

Every contractors bond has three parties involved:

  • The principal is the contractor purchasing the bond to guarantee that they will fulfill their obligations.
  • The obligee is the party who requires the bond, which could be the project owner, or a government agency.
  • The surety is the insurance company who issues the Bond.

 
In the event of a claim, the claimant is the one who can make a claim on the bond in the event that the principal does not fulfill their obligations. The claimant is often, but not always, the same as the obligee.

Who purchases contractor surety bonds?

The contractor is required to secure a surety bond. For some bonds, such as performance bonds, contractors can include the cost of the bond within their bid for a project, however, this may make their bid less competitive.

Who do contractor bonds protect?

It is important to understand that a surety bond protects the claimant, not the principal. Unlike a traditional insurance policy, contractor bonds protect the general public – not the contractor. The bonds are required to ensure that the contractor follows the regulations outlined in the contract, and to protect customers from losses.

Here are some of the bonds you will need as a contractor.

Types of Contractor Bonds

Contractor License Bond

In order to receive a license, contractors must post a security deposit with the Contractors State License Board (CSLB). While you can use cash or a certificate of deposit, surety bonds are commonly used to secure contractor licenses.

The contractor purchases the license bond from the surety, and the surety guarantees to the State that the contractor will comply with licensing laws.

How Much Do Contractor License Bonds Cost?

Contractor license bond requirements vary from State to State, usually ranging between $1,000 to $50,000. The rate for a license bond is generally charged as a portion of the overall bond amount, and the percentage varies according to various factors like the applicant’s credit score.

When Do I Need a Contractor License Bond?

You will need a contractor license bond in order to receive your contractor license.

Why Do I Need a Contractor License Bond?

Government agencies require contractors to purchase contractor surety bonds in order to certify that they will abide by applicable laws. If the contractor violates any laws covered by the bond, causing another party a loss, then the affected customer, employee, or supplier may make a claim against the bond to recoup their losses.

If the claim is deemed to be correct, then the surety will pay out funds from the license bond, and the contractor will be responsible to the surety for the amount that was paid out.

Sureties are required by law to report any claims paid on bonds to the CSLB, and in the event that the contractor does not repay the surety, they can lose their license, either through the surety canceling the bond, or the CSLB suspending their license.

What Do I Need to Secure a Contractor License Bond?

To apply for a contractor bond you will need the specific bond form, which is the document that contains the wording of the bond. Often, the government agency requiring the bond will have a form they require you to use.

At Viking Bond, we usually have a copy of these bond forms already.

You will also need to know the name of the agency who requires the bond, and the bond amount that they specify (usually a standard amount).

Construction Bonds

When bidding on and performing construction projects, contractors must acquire several types of construction bonds that guarantee that they will fulfill their contracts. Construction surety bonds are also sometimes called “contract bonds.”

 A Surety Bond Guide for The Construction Industry

When Do I Need a Construction Bond?

You will need to secure a construction bond in order to bid on most construction projects, such as any federally funded project of $100,000 or more. Before submitting a bid, you will need a bid bond, and then before construction begins you will usually need to secure a performance bond and payment bond.

Why Do I Need a Construction Bond?

There are very few construction jobs that you will be able to get without construction bonds, both in the private and public sector.

There are three common types of Construction Bonds:

  1. A bid bond is a surety bond attached to a contractor’s bid on a job. It guarantees that if the contractor’s bid is chosen, they will accept the contract from the developer, and furnish a performance bond.
  2. A performance bond is often a requirement of accepting a job, and it certifies that the contractor will finish the contracted project satisfactorily.
  3. A payment bond is necessary when a contractor hires sub-contractors, laborers, or suppliers to assist with a project. The bond ensures payment to all of those parties.

Bid Bonds

A bid bond ensures that a contractor bidding on a project will enter into the contract with the project owner (the obligee) and secure a performance bond and a payment bond if they are awarded the job.

When Do You Need a Bid Bond?

You need to purchase a bid bond before bidding on a job.

Why Do You Need a Bid Bond?

Bid bonds are required to provide a guarantee that all bids on projects are serious, and that bidding contractors have the ability to secure performance bonds and complete the jobs. Bid bonds became common as a response to contractors submitting low bids from projects and then failing to complete them, or raising their quote once they received the job.

How Much Are Bid Bonds Written for?

Bid bonds are written for the amount of the contract bid, with the same standards as performance bonds.

How Much Do Bid Bonds Cost?

Bid bonds are generally inexpensive, ranging between free to approximately $350. The actual cost will vary based on the contract terms, the location, and the amount of the bid.

However, bid bonds come with the guarantee of the surety awarding a performance bond in the event that the contractor’s bid is successful, and performance bonds generally cost between 1% and 5% of the performance bond amount.

What Do You Need to Secure a Bid Bond?

For a surety to issue a bid bond, they are agreeing to provide a performance bond should the bid be accepted. As such, the application for a bid bond is similar to that of a performance bond, and includes:

  • The bid amount
  • The bid date
  • Your bonding history (have you received bonds before)?
  • Company history – how long you’ve been in business.
  • Your credit score

 
To bid on projects above $250,000, you will need to produce some more financial information.

Performance Bonds

A performance bond guarantees that a contractor will complete a project, or provide satisfactory performance on a job they are hired to perform.

When Do I Need a Performance Bond?

You will need to secure a performance bond before beginning construction on most jobs. In most cases, you will have already secured a bid bond in order to bid on the project, which means that a surety has agreed to provide you with a performance bond when you are awarded the job.

Why Do I Need a Performance Bond?

The Federal Miller Act requires performance bonds on all federally funded construction projects of $100,000 and more. Many private developers require performance bonds as well to ensure that jobs are completed. General contractors also usually require their subcontractors to furnish performance bonds (this is called “bonding back”).

How Much Do Performance Bonds Cost?

Performance Bonds are written for the dollar value of the work being performed. Performance bond rates are determined as a small percentage of the full bond amount, generally between 1% and 5%.

The rate varies based on many factors, such as the credit score of the applicant, and the size of the job. For example, surety bonds on larger contracts often cost a lower percentage of the total amount than smaller projects, though smaller projects have fewer underwriting requirements.

Here are some factors that impact the cost of a performance bond:

  • The bond amount
  • The size of the contract
  • The State where the job is
  • Applicant’s credit and financial status
  • Applicant’s business history
  • Surety Provider: Some sureties offer better rates, and some may be more willing to provide performance bonds for certain types of work.
  • Fees from brokers and agents, such as commissions and operating costs like overnight fees, and credit report charges.

 
Some contractors include the cost of their performance bond in their bid, though that can make the bid less competitively priced.

What Do I Need to Secure a Performance Bond?

For projects of $350,000 or less, it is possible to secure a Performance Bond based on just your tax returns, if you have good credit.

However, you need to provide the following information to your surety provider in order to secure a performance bond:

  • The project description
  • Your bid amount
  • Your funding source
  • Information about yourself and your company, including:
    • How long your company has existed
    • Your bonding history
    • Your personal credit score
    • Business financials, including: Balance sheet, income statement, cash flow statement, work schedules, and complete notes and disclosures.

     
    More complicated / larger performance bonds often require:

    • A credit check
    • A full-length contractor questionnaire
    • A copy of the contract or bid invitation
    • Your prior year and current business financials
    • Personal financial information on all company owners
    • A bank letter

     
    Personal credit is very important for securing performance bonds, especially for smaller contracts. However, you can still get a bond with bad credit, and credit has less of an impact on bonds for larger contracts, especially if you are an established company with good business financials.

    Payment Bonds

    Payment Bonds ensure that all laborers, suppliers, and subcontractors involved in a job are paid, even if the contractor becomes insolvent during a project.

    When Do I Need a Payment Bond?

    Generally, contractors secure payment bonds in the same package as their performance bond during the contract negotiation phase before the start of a job.

    Why Do I Need a Payment Bond?

    The Federal Miller Act mandates that contractors secure payment bonds on every federally funded project of $100,000 and above. Most private projects and state-funded projects also require payment bonds.

    How Much Do Payment Bonds Cost?

    Payment bond rates are determined as a small percentage of the full contract amount, generally between 1% and 4% for applicants with good credit.

    Your rate will be based on several factors, such as the bond amount, your credit score, and business history.

    What Do You Need to Secure a Payment Bond?

    In order to apply for a payment bond, you will likely need to furnish:

    • The contract terms for your project
    • The bond amount
    • Your credit score
    • Your work record
    • Financial qualifications

     
    Payment bonds are riskier than other surety bonds for construction, so they are harder to qualify for, especially for those with bad credit. Applicants with bad credit may be able to secure payment bonds with positive business financials prepared by a professional construction CPA.

    Projects of $250,000 and up have a more rigorous application process that often includes further financial records, business documentation, and proof of industry experience.

    Subdivision Bonds

    Subdivision bonds cover every aspect of construction within a subdivision, guaranteeing that the required improvements are completed properly and in a timely fashion.

    Subdivision bonds are also known as:

    • Developer bonds
    • Land improvement bonds
    • Site improvement bonds
    • Plat bonds
    • Completion bonds
    • Performance bonds

     
    One key difference between subdivision bonds and traditional performance bonds is that the principal who secures the subdivision bond is responsible for paying the cost of building the bonded improvements, rather than the obligee. Usually, the owner or project developer will secure the subdivision bond. However, if a contractor posts the subdivision on behalf of the owner, then the contractor is obligated to finish the improvements and pay for them, whether or not they receive money from the owner or developer.

    When Do I Need a Subdivision Bond?

    Some state governments and municipalities require landowners to secure subdivision bonds before making improvements to land within a subdivision, such as improving electrical lines, sewer, sidewalks, gutters, grading, etc.

    Why Do I Need a Subdivision Bond?

    Government agencies require subdivision bonds for all work done on subdivisions to ensure that project expectations are met. Subdivision bonds hold contractors accountable to build and/or renovate important public systems such as sidewalks, sewage systems, and electrical lines to meet local requirements.

    How Much Do Subdivision Bonds Cost?

    Subdivision bonds are written for the estimate of the project costs. Subdivision bond rates are calculated as a small percentage of the total bond amount, usually around 3%.

    Factors that influence your bond cost:

    • Size and terms of the contract
    • Amount of the bond
    • Principal contractor’s work record and financial qualifications.
    • Principal contractor’s credit score

    What Do You Need to Secure a Subdivision Bond?

    When applying for a subdivision bond, you will usually need:

    • Bond application
    • Background and financial information check
    • Verification of developer’s capacity, experience, finances, and character
    • Credit check
    • Information about the scope of the project
    • Project cost information
    • Funding source

    Some projects may require:

    • Three year-end financial reports
    • Personal financial statements for each owner
    • Key people information
    • Project completion history
    • Banking relationships
    • Business plans
    • All applicable partnerships, trusts, or operating agreements.

    Warranty and Maintenance Bonds

    Warranty and Maintenance bonds guarantee the quality of the work done on a contracted job, that it meets state regulations, construction standards and building codes, that the work will hold up for at least the amount of time specified in the contract, and that if there are any problems within that period, the contractor will remedy them.

     A Surety Bond Guide for The Construction Industry

    When do I need a Warranty and Maintenance bond?

    Warranty and Maintenance bonds are issued once the work is completed and the obligee accepts it.

    Why do I need a warranty and maintenance bond?

    In certain cases, such as land development, local laws and statutes mandate warranty and maintenance bonds.

    How much do maintenance bonds cost?

    The cost of a maintenance bond is determined as a percentage of the bond amount, usually between 1% and 4% for applicants with good credit.

    What do I need to secure a warranty bond?

    To secure a warranty bond, you will need to undergo a credit check. Some sureties will ask for the scope of the initial construction project, financial statements, and/or the contractor’s business experience and work history.

    What Happens in the Event of a Claim on a Bond?

    If a party claims that the contractor did not fulfill their contracted responsibilities, they can make a claim on the bond to recoup their losses.
    The surety will then investigate the claim, and determine if it is valid. If it is, then the surety will pay out funds from the bond as restitution for the claimant’s losses. After that, the contractor will be responsible to reimburse the surety for any monies paid out to the claimant.

    If the surety does not find fault on behalf of the contractor, no payment will be made, and the contractor will not be responsible to pay the surety any money.

    Why Are Contractor Bonds Important?

    Contractors bonds ensure good behavior on behalf of contractors. There is more than $450,000,000,000 of construction work annually.

    Unfortunately, the industry features high failure rates for companies. 51% of residential remodeling companies that were in business in 2007 no longer existed in 2012. These high failure rates leave many construction projects unfinished.

    Contractors bonds exist to ensure that construction projects which are so important to our society – homes, office buildings, developments, and more, can be completed even if a contractor has difficulties outside of the project owner’s control.

    Thus, contractor bonds are vital to protecting consumers and States.

    How to Get Your Contractor Bonds

    Who you work with to get your contractor surety bond matters: Not only for cost, but in the event of a claim, you want a surety provider who will work hard and be able to accurately investigate claims.

    The team at Viking Bond provides construction surety bonds of all types and sizes nationwide. We can provide quotes quickly, often even the same day, and work with clients with bad credit in most situations.

    There are three easy ways to get in touch with Viking Bond to find out more, or to get a surety bond for construction quote today:

    • Call us at 1-888-278-7389 OR
    • Complete an Online Application for any surety bond that we offer OR
    • Complete the contact form on the page. One of our agents will contact you shortly.

     
    To find out more or request a quote, contact Viking Bonds today. Our knowledgeable and friendly team is ready to assist you with all of your construction bond needs.