BONDS

There are several types of bonds. Each guarantees a specific performance or payment from the contractor. These types are described below.

Bid Bonds- Bid bonds ensure that the contractor will honor the bid he or she has submitted by entering into the contract, accepting its terms, and providing any required performance and payment bonds. In the event that the contractor defaults and does not enter into the contract, the bid bond is used to cover (to the extent of its face value) the difference between his or her bid and the next lowest bid.

Performance Bonds- Performance bonds guarantee to the owner that the project will be completed according to the plans, specifications, terms, and conditions of the contract. In the event that the contractor does default, by being unable or unwilling to perform the work, the responsibility of completing the project, to the extent of the bond’s face value, falls upon the surety.

Payment Bonds- Payment bonds protect the owner, developer, or government agency against claims that may be filed against the contractor to satisfy taxes, unpaid labor, or bills for material used on the project. This bond keeps the property free of liens from unpaid subcontractors or suppliers.

Completion Bonds- Completion bonds guarantee that the contractor will perform the work per the contract and pay all obligations incurred in the project. These bonds may be used instead of separate performance and payment bonds.

Maintenance Bonds-Maintenance bonds protect the owner from faulty workmanship or materials that may show up after completion of the project. Generally, maintenance bonds expire one year after the work is finished.

License Bonds-License Bonds may be required by the licensing agency before granting a contractor’s license. The coverage afforded by this type of bond is contained in the law (stature) requiring the bond. For this reason they are referred to as statutory bonds, as opposed to private project “common law” bonds.

OBTAINING BONDS

Contractors generally look to their insurance agents when they need a contract bond. The insurance agent and the contractor will work with the surety company to qualify or underwrite the contractor’s bond application.

In the underwriting process, the surety evaluates the contractor in light of the project to be undertaken. The surety will usually look for the following items when underwriting a bond:

• The contractor’s performance record in the completion of projects and reasonable satisfaction of his or her obligations under the terms of his or her contract with the owner. This investigation may include the overall character of the contractor.

• The capacity of the contractor to undertake and complete the project the bond would cover. This includes experience on similar projects, knowledge of the contractor’s staff, availability of equipment required, and other factors. Sureties may be hesitant to bond a contractor for a type of project the contractor has never undertaken before or in a distant new location.

• The ability of the contractor to finance the project to completion in the event that he or she has under bid the costs of completion. In other words, does the contractor have the necessary working capital to cover the cash flow needs of this job if he or she underestimated the cost of the project? The amount of credit a surety will extend is based on the contractor’s working capital and net worth. The maximum bond amounts for a single project are usually limited to ten (10) times the contractor’s working capital.