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Guide to Bond Requirements for Infrastructure Projects

Without infrastructure you don't have anything else. America's roads, bridges, canals, water treatment plants and countless other critical assets make life as we know it possible. Given how expansive and important infrastructure is, it comes as no surprise that it requires massive investments on an ongoing basis.

Hundreds of billions of dollars get spent at the Federal, State, and Local level to repair and maintain current infrastructure or completing new projects. Research shows that between 2007 and 2017, real spending on infrastructure dropped by almost $10 billion, but it still topped $400 billion nationwide. The point is - incredible sums go towards keeping the nation's infrastructure safe and effective.

By all accounts, those numbers will soon climb much higher as the US begins replacing aging infrastructure assets on a grand scale. The American Society of Civil Engineers estimates we need to spend an additional $1.5 trillion on infrastructure by 2025. According to The Department of Transportation, we need $800 billion in spending just on roads and bridges. Congress has yet to pass a comprehensive infrastructure spending bill, but it's perennially up for debate, and whatever form it takes will unleash massive amounts of new investments for projects large and small across the country.

For any businesses involved with infrastructure projects, the future looks very bright. The biggest challenge might be keeping up with all the work available. But if you're going to capitalize on this incredible opportunity, you need to understand all the obstacles and obligations involved - especially in regard to surety bonds.

In this comprehensive guide, we will demystify the bonding process, explaining why you need performance bonds for infrastructure projects, how they work, and what they mean for your business. With good information and the right bonding partner, you're well-equipped for the infrastructure boom coming soon.

What are Performance Bonds for Infrastructure Contracts?

Also known as contract performance bonds they're a way to ensure that the parties involved with building or maintaining infrastructure projects meet all their contractual obligations. Before signing a contract or committing to a project, the public or private entity paying for the work to be done will require the entity performing the work to obtain a contract bond, supply bond, or some other form of performance bond related to infrastructure projects The bond serves as a kind of financial guarantee. If the party that required the bond feels like the bond holder failed to deliver what was outlined in the contract, the aggrieved party can file a claim against the bond seeking compensation. If that claim proves to be valid and the offending party refuses to pay, the company that issues the bond agrees to settle the claim. That way, parties who may be at risk from unscrupulous or duplicitous contractors can insulate themselves from financial losses when entering into a contract.

Why Are Bonds Necessary for Infrastructure Projects?

As the numbers in the introduction illustrate, vast sums of money get invested into infrastructure. And in addition to having a huge financial footprint, infrastructure projects have important implications in terms of safety and stability. Basically, these projects need to run on time, within budget, and according to exact specification or else there could be implications that ripple into the broader economy. Performance bonds associated with infrastructure projects help prevent that from happening by creating an additional financial incentive to carry out contractual obligations. When someone obtains a bond, they agree to accept the financial consequences of substandard performance. Think of it as a form of enforced accountability - there's no way for the bond holder to escape their mistakes. Thanks to this guarantee, organizations preparing to invest millions or billions in infrastructure feel more comfortable signing a contract with a specific company. Alternatively, that company is able to show it's trustworthy, transparent, and fully-committed to the contract. Ultimately, infrastructure projects require contractors and other stakeholders to obtain supply or performance bonds because they're good for all involved.

What Infrastructure Projects Need Performance Bonds?

The reason you will hear these bonds called contract performance bonds is because they're often tied to a specific performance benchmarks mandated inside the contract - e.g. deliver a certain quantity of goods or complete a certain percentage of a project on deadline. Since bonds make it easier to enforce the terms of a contract, you typically need to acquire a bond before signing the contract. Otherwise, the deal cannot proceed. In other cases, bonds are required by law, particularly when performing infrastructure work directly on behalf of government entities. In that case, the stakes are the same - without a bond the project can't proceed. Since bonds represent an all-or-nothing obstacle, you will typically know if you need a bond early in the process. At that point, it's in your best interest to secure a bond as soon as possible since you gain nothing by waiting until later. Seek out a surety agency like Viking Bond Service that serves customers in all 50 states and has the resources to write bonds related to all manner of infrastructure projects.

Who are the Parties in a Bond Agreement?

You might assume since there are two parties involved in a contract there are also two parties behind the bond connected to that contract. But there are actually three parties involved:

  • Principal - The bond holder, and usually the contractor performing infrastructure work for a larger entity. In a bond agreement, the principal must obtain the necessary bond(s), renew it as necessary, and pay for any claims filed against the bond. The principal may contest the claims or refuse to pay, but if the claim is valid, the principal has the legal responsibility to bear the financial burden.
  • Obligee - The bond beneficiary, and the person who requires the bond to be in place before the project continues. As part of the bond agreement associated with the infrastructure project, the obligee may file claims against the bond if they believe the principal has engaged in any behavior prohibited under contract. If that claim proves valid, the surety guarantees payment.
  • Surety - The bond company, and the party that serves as an intermediary between the principal and obligee. The surety will bring in lawyers or investigators to help determine whether claims are valid. When they are, the surety will step in to pay when the principal is unable or unwilling. Afterwards, however, the principal must pay the surety back with interest and fees added.

Different Kinds of Performance Bonds for Infrastructure Projects

Lots of things qualify as infrastructure projects, everything from improving the electrical grid to expanding the interstate highway system. Many of these infrastructure projects will involve performance bonds, but they might not be called that, or called supply contract bonds either. In fact, the specifics of the bond depends on the work being done and the nature of the contract. Here are some common examples:

  • Bid Bond - Most infrastructure projects require contractors to submit a bid for how much the work will cost. Bid bonds allow the company that accepted the bid to file a claim against the bond if the contractor backs out of the contract after winning the bid.
  • Construction Bond - This is another term for performance bonds and a blanket term for bonds that apply to construction projects. Construction bonds give parties that have been wronged by a contractor the means to pursue financial compensation if construction projects don't go strictly as planned.
  • Payment Bond - If a contractor goes bankrupt during an infrastructure project, payment bonds allow laborers, suppliers, or subcontractors who are still owed money to file a claim for compensation. Many contracts require payment bonds in conjunction with bid and performance bonds.
  • Performance Bond - When a contract requires meeting specific performance obligations, performance bonds hold parties accountable if they fail at what was prescribed. It's similar to when a company guarantees it's work, except the guarantee is enforceable by law.
  • Subdivision Bond - When housing subdivisions require additions or improvements to the municipal power, water, or sewer infrastructure, the subdivision developer may need to secure this bond. The bond basically obligates the developer to complete the infrastructure work according to strict rules and guidelines.
  • Supply Bond - When a supplier fails to deliver a shipment on time, in full, or in accordance with some other standard, a supply bond will compensate the receiving party.
  • Timber Sales Bond - Federal lands may require contractors to pay fees before clearing trees for commercial sales or infrastructure development. A timber sales bond gives the federal government a means to seek compensation if the fees are not paid in a timely manner.
  • Warranty/Maintenance Bond - Unlike most other bonds on this list, warranty/maintenance bonds are issued after a project is complete. They provide an assurance that the work performed will retain set quality and/or stability thresholds for a set period of time after the initial work was completed. If the quality threshold is breached during the warranty period, the bond comes into play.

What is the SBA Surety Bond Guarantee Program?

Bonds are a critical part of infrastructure, which is a critical part of America's future. Yet not every small business has the full qualifications it needs to obtain some of the bonds it requires, which only creates unnecessary delays and obstacles for everyone. In response, the Small Business Administration (SBA) has created the SBA Surety Bond Guarantee Program. It helps small businesses get a better chance at approval for bid, payment, and performance bonds. The SBA takes on a portion of the risk of bonding the contractor so the surety is more comfortable with writing the bond.

How Much Does a Contract or Supply Bond Cost?

When you obtain a bond, the bond amount gets tied to the contract amount, meaning the total amount the surety brokerage agrees to pay to settle claims against the bond will not exceed the contract value. The contract, whether for a construction project or materials supply, specifies how large the bond must be - e.g. $250k contract will require a $250k bond. The cost to you depends on the risk you pose to the surety. After submitting your bond application, underwriters will evaluate that risk, meaning how likely you are to pay the surety back for any claims it compensates, based on your financial history and industry experience. Since risk goes up with larger bonds, they require additional underwriting, just like when you apply for a substantial loan. Bond premiums (the cost of the bond) can either be a small percentage of the total or a figure based on a sliding scale. You must pay the premium upfront to obtain the bond, and pay additional if the contract amount increases after the project has started. You will also pay for any claims filed against the bond, either directly to the obligee or directly to the surety to settle your debt.

How Do You Apply for a Contract Performance Bond?

First, you need to find a surety agency you can trust. You're looking for a surety company that has extensive resources to offer, goes above and beyond to provide assistance, and works to keep premiums as low as possible for all bond applicants. Ideally, the company you contact initially, remains your bond provider for as long as you require a bond, and continues to meet your needs the next time you need a bond. That way you don't have to go searching for another surety agency and potentially put your bond status in jeopardy. For all the assistance you need finding the best option available, work with Viking Bond Service - one of the country's top surety bond only agencies. You will simply need to submit a bond application, which asks for business, personal and credit information, as well as financial statements, a copy of the contract, and other documentation as necessary. Underwriters will use this information to estimate your credit risk and calculate your bond premium. Finally, you will pay the premium to activate the bond, then provide documentation to the obligee proving you've met the bond requirement.

Viking Bond Service - Helping You Build America

Whenever you need a bond to get an infrastructure project on track, count on Viking Bond Service - serving all 50 states. Our in-house bond experts make the intricacies of performance bonds for infrastructure contracts easy to follow. Feel free to contact us here or call 888-278-7389 for assistance.

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