Surety Bonding Frequently Asked Questions
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Surety is the act of a person or corporation making themselves liable for another’s debts, defaults or obligations, etc…
Bondable means that the Contractor’s capital, character & capacity have been analyzed by a Surety Underwriter. The Surety Underwriter has then determined that the Contractor can perform certain types of work within established parameters. Based upon that determination, the Surety Company will issue Surety Bonds guaranteeing the Contractors performance and/or payments within the resolved guidelines.
No. The purpose of requiring Surety Bonding is to have the Surety Company thoroughly analyze the capabilities and capacity of the Contractor to verify their ability to complete the project in the desired manner. Since the Surety Company is not in the contracting business and therefore has no desire to end up with having to complete the guaranteed work, they are very particular about the Contractors they bond.
Does that mean that the new Contractors and those that have had some problems are excluded from Bonding?
Again no. As previously discussed, there are a variety of Surety Companies and Surety Programs available. Many include special arrangements or SBA backing for Emerging Contractors or those with explainable prior difficulties. There are a number of entry level and small contractor programs now available.
This is where your agent becomes most important. The experienced Surety Agent can usually find some Surety support for any worthy contractor.
Ideally, the Surety Company wants to see three years of Reviewed, CPA prepared business financial statements along with Work in Progress Schedules, Accounts Payable and Accounts Receivable Schedules, Company & Contractor Histories, Bank References and thoroughly completed questionnaire (often, surety support is established with less). The Surety Agent’s job is to retrieve this information from the contractor, verify its completeness, evaluate the provided information and submit it to the Surety Company that will best match up with the contractor’s needs and capabilities.
The Surety Companies use various underwriting guidelines to ascertain what Surety limits are applicable. Financial strength, prior job history, time in business and type of work are some of the components. The Surety Agent usually works with the Contractor to present the most favorable illustration for the Surety Company to review.
A Bid Bond is issued by the Surety to the owner of the project in lieu of a required cash deposit. The cash deposit (usually 10% of the bid amount) is subject to full or partial forfeiture if the contractor is the low bidder and fails to either execute the contract or provide the required Performance and/or Payment Bonds.
Nearly all Public Sector jobs and many private ones require the posting of a bid bond or cashiers check at the time the bid is submitted.
The Surety Company normally charges an annual Bid Bond Service Undertaking Fee ranging from $150-$300. This fee covers the charges for any and all bid bonds provided within that time period.
Performance / Payment Bonds
A Performance Bond is a non-cancelable commitment issued by the surety to the owner of the project (obligee) guaranteeing that the Contractor will complete the referenced contract within its set terms and conditions. A Payment Bond guarantees that all sub contractors, labormen and material suppliers will be paid leaving the project lien free.
Performance/Payment Bonds (Final Bonds) are usually required on all Public Sector jobs and many Private ones. Whoever initially requires bid bonds customarily need to be issued final bonds within 30 days of the award date or prior to any contract payment.
The premium rate for Performance/Payment Bonds varies upon the contract price, type of work, strength of the Contractor and the Surety Company. The rate can range from less than 1% to over 4% of the total contract price. The Payment Bond is added at no additional charge. A Payment Only Bond is rarely requested and is billed usually at about 50% of the regular premium.