What are Contract Surety Bonds?
Contract Surety Bonds are a combination of multiple bonds under one heading. Bid, Payment, Performance, Supply, Maintenance and Warranty bonds make up what are commonly referred to as Contract Surety Bonds and each bond type has its own specific role in protecting the obligee. Contract surety bonds are a form of financial security for the project owner or general contractor.
Parties to the bonding process
- Principal - Usually a contractor or subcontractor who is required to post the surety bond
- Obligee - Project owner or General Contractor who is requiring the surety bond
- Surety - The company who is issuing the bonds and providing the financial guarantee to the obligee
Why are Contract Surety Bonds Required?
Public Works projects and the Miller Act- Under a federal law know as the Miller Act, which states that any Public Works project for the construction, alteration, or repair of any public building or public work of the Federal Government, Contract Surety bonds must be posted on any contract exceeding $150,000.00. While this is a Federal law, most states have enacted "Little Miller Acts" which establish similar requirements for any Public Works Projects wherein the Obligee is a specific state, city, county or other non federal municipality.
Private Works - Private contracts for construction or construction related services will often include a requirement for the posting of security in the form of Contract Surety Bonds. Obligees and/or General Contractors looking to protect themselves from non-payment or default of a General Contractor or a Sub Contractor can require them to post contract surety bonds in accordance with the contract.
Types of Contract Surety Bonds
Bid Bonds guarantee to the Obligee that Principal will honor their bid. Bid bonds also provide assurances to the Obligee that the company has been properly pre-qualified by a Surety Company to provide the required Payment & Performance bonds upon acceptance of their bid. In the event the Principal retracts their bid or cannot provide the requisite Payment & Performance bonds, the obligee can file a claim with the Surety to assist in covering the costs of putting the project out for rebid or to offset the cost difference between the winning bid and the next highest bidders bid.
Performance Bonds guarantee that the Principal will complete the project in accordance with the underlying contract for the amount agreed upon in their bid. In the event of a default by the Principal, the Obligee can file a claim with the Surety for damages sustained as a result of the default.
Payment Bonds guarantee payment of all bills relating to Labor and or Materials utilized in the course of work on the bonded project.
Supply Bonds supply bonds ensure that the Principal will supply all materials in accordance with the specific terms of the contract, free and clear of any encumbrances to the Obligee.
Maintenance Bonds / Warranty Bonds guarantee that the Principals work will be free of defects from faulty workmanship or use of substandard materials for a specified time after the completion and acceptance by the Obligee.
Contract Surety Bond Costs
What do Bid Bonds Cost?
Charges vary for bid bonds from surety company to surety company. For smaller accounts you can typically expect to see a small fee charged for each bid bond requested or you can elect to pay a 1 time fee for unlimited bid bonds for a calendar year. Larger accounts can expect to see the fee waived entirely for bid bonds. APPLY FOR A BID BOND
What do Performance & Payment Surety Bonds Cost?
Rates for Payment and Performance Surety Bonds will vary with the qualifying factors of the account. A basic rate is 2%-3% of the overall contract or bond amount.
Accounts are able to qualify for lower rates based upon factors such as credit, financial strength of the business, financial strength the business owners, prior experience performing bonded work, and the size of the contract.
Smaller contracts, under $350,000 are able to be written (in most cases) based solely on a credit report of the business owners. However, in some instances, there may be a requirement for additional information based on the information showing on the credit report. In some cases, only a payment bond or only a performance bond will be required. APPLY FOR PERFORMANCE & PAYMENT SURETY BONDS
What do Supply Surety Bonds Cost?
Rates for Supply Surety Bonds will vary with the qualifying factors of the account and the terms of the contract. A base rate for a Supply Surety Bond is 3%. APPLY FOR A SUPPLY SURETY BOND
What do Maintenance / Warranty Surety Bonds Cost?
Most Surety Companies do not charge for a 1 year Maintenance/Warranty Surety Bonds when they have issued the Performance and Payment Surety Bonds. In the event that the contract specifies a longer term than 1 year, the surety company will institute an additional charge, however terms greater than 2 years are typically not considered without a strong case. APPLY FOR A MAINTENANCE SURETY BOND
Surety Bonds frequently required with Contract Surety Bonds
Lien Release Surety Bonds
While these are classified as court surety bonds, they are often required upon the completion of the project. Typically when a subcontractor, laborer or supplier feels that there is an outstanding balance owed to them upon completion, they will file a lien against the project. In order to release the lien, a Lien Release Surety Bond can be issued to take the place of the lien, until the dispute is resolved. Rates for these bonds are typically 1% or less of the amount of the bond, which is usually 1.5 times the lien amount.
Contractors License Surety Bonds
Most contractors will be required to have a license and part of the requirements of many licenses is to post and maintain a Contractors License Surety Bond. Rates for these bonds vary greatly depending upon the State, bond amount, underlying risk and credit of the principal. APPLY FOR A CONTRACTORS LICENSE SURETY BOND