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Contract Bonds

Contract bonds guarantee the contractor (principal) will perform the work and pay their suppliers, subcontractors, and laborers. Below are types of contract bonds and how to apply.

Bid Bonds

Bid bonds are required of contractors engaging in the competitive bid process for awards of public projects. When a contractor submits its sealed bid, bid security is often required. Typical bid security is 5% – 10%, although most Federal Contracts may require 20%.

The bid bond makes the following guarantees:

  1. That the bidder, if awarded the bid, will sign the contract for the price indicated in the bid.
  2. That the successful bidder will provide the requisite performance and payment bonds as required by the contract.

Performance & Payment Bond(sometimes referred to as a contract bond)

Performance bonds guarantee the performance of a contract by the contractor. The signed contract includes the guarantee that the contractor will complete the contract for the agreed-upon price in the specified amount of time. In the event of default of contract by the contractor, the surety is required to step in and fulfill the requirements of the contract. The surety can do this by either funding the bonded contractor so that they can complete the project, hire a new contractor, or pay the project owner the necessary funds to complete the project.

Rates for performance bonds vary, depending on the type of work being performed and the financial profile of the contractor. Most sureties have a multi-level, tiered rating system.

To apply for a contract bond line, what surety companies call a standard account, surety companies require the following:

  • Completed Contractors Questionnaire
  • Last 2 or 3 years’ business financial statements, preferably prepared by CPA
  • Personal financial statements of each owner of the business
  • Bank letter of reference, to include information on lines of credit
  • Current work on hand report
  • Project and Supplier References
  • Current certificate of insurance

There are also programs available for contractors that have minimal or infrequent bond needs. This is called a FastBond and has minimal underwriting requirements.

Maintenance or Warranty Bond

A maintenance bond, sometimes also referred to as a warranty bond, guarantees the workmanship of a contractor for a given period of time after the project has been completed. Maintenance bonds guarantee against defective workmanship or defective materials.

Maintenance bonds are not usually required, but can be requested by the owner of a construction project.

Right of Way Bond

This bond will generally guarantee the terms of a permit in granting a developer, property owner, or contractor the ability to work in or on the right of way or easement. This work sometimes includes the installation of utilities, turn lanes, traffic signals, etc.

Supply Bond

This bond is written to guarantee the terms of a supply contract.

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