A great deal of state and federal construction projects require that contractors who are awarded a contract also get surety bonds. These bonds, also known as contract bonds, are required as a form of guarantee that the contractor will comply with their various obligations under the construction contract.
Different construction bonds are required for certain stages of the contracting process. Moreover, they are acquired in different ways and include particular conditions that contractors must comply with.
See below for a guide on the different types of bonds and how to get bonded for construction projects!
What Are The Different Kinds of Contract Bonds?
Contractors typically need to obtain several different bonds. These bonds reflect the different aspects and stages of a construction project that need to be financially secured. In short, some of the main types of contract bonds are:
- Bid bonds – required during the bid stage to guarantee the bid that a contractor submits and that if they are awarded a contract they will execute it at the bid price
- Performance bonds – required during the execution of the project, and guarantee the performance of the contractor under the conditions of their contract
- Payment bonds – guarantee that workers, suppliers, subcontractors and other parties working for a contractor under a project will be paid what they are due
- Maintenance bonds – guarantee that for a certain amount of time after the completion of a project, there will be no faults or defects
To obtain any of these bonds, the bonding and application process slightly differs. See the next section for an explanation of the process.
How Does One Get Bonded For a Construction Project?
In a nutshell, the bonding process for a construction project goes like this:
- You obtain a bid bond as is required in the specifications of the job you will be competing for.
- If you win the bid, you obtain a performance and payment bond.
- Once the project is completed, and if required, you obtain a maintenance bond to guarantee for the quality of your work.
More specifically, these bonds are obtained in the following ways:
How to get a bid bond
When you apply for a bid bond, it is usually equal to a percentage of the full contract amount. For example, if you have a $250,000 contract and are asked to obtain a bid bond equal to 10% of that amount, you will need a $25,000 bid bond.
You will then need to pay a certain cost, a premium, to get bonded. Premiums for bid bonds are not high because sureties carefully vet applicants for these bonds before they approve them. The vetting process is strict because sureties want to make sure that if the contractor is bonded, they will not withdraw from the bid procedure.
So, if a surety approves of a contractor, it will issue their bid bond at a fairly low price – often as low as $100.
How to get a performance and payment bond
When you win a contract, you will be asked to obtain a performance bond and a payment bond in an amount equal to that of the contract. Even though these two are considered separate bonds, they are usually issued together.
The cost of getting these bonds will depend on 1) the contract amount and 2) your credit score and financials. Typically, for bonds under $250K, the surety will mostly look at your personal credit score to determine the rate at which you can get bonded. Applicants with excellent scores can usually expect to get their bond at a rate between 1% and 3% of the total bond amount.
If you need a bond in a higher amount, such as a 1 million dollar bond, you will usually have to go through a more thorough underwriting procedure. During the application, you will likely be asked to provide more detailed financial and performance information, and more.
The rate at which you can get bonded for a bond with a high amount is somewhat different than for those in smaller amounts. In the example of the $1M bond, your premium is likely to be issued at a sliding scale. For example, the first $100,000 of the project may be bonded at 2%, the next $300,000 at 1.5%, and the remaining $600,000 at 1%.
How to get a maintenance bond
The requirement to get a maintenance bond is usually included upfront in your contract. Once you complete the project, you need to apply for a maintenance bond in an amount specified in your contract.
The application process itself is fairly simple. As with other surety bonds, the cost of this bond will be equal to some percentage of the total bond amount. The higher your credit score, the lower your bond cost will be. Applicants with good scores can typically expect to get a rate in the range of 1%-4% of their bond amount.
It is also likely that if you get a maintenance bond, the total costs of your contract bonds may be reduced, as risks associated with your work will be spread across a greater number of bonds.
Apply For Your Contract Bond
To apply for your contract bond, simply click on the banner below and complete the bond form. We’ll then get in touch with you to provide you with a free quote or to request more information, depending on the details of your application.