How a Construction Bond is Granted

A Construction Bond is simply a general term used to describe the many different bond types that make up a construction project contract from start to finish. This is why you will often times hear ‘construction bond’ and ‘contract bond’ used interchangeably.

A construction surety bond is essentially a contract between three parties that helps ensure the fulfillment of a contract. In the three parties, the principal is the party who performs the work, while the obligee is the receiver of the work performed by the principal. The surety is a neutral third party that is employed to see that all work performed by the principal is performed on time and according to the agreement. The surety is also responsible for overseeing all obligations on the part of both the principal and the obligee.

A construction bond, or contract bond, is not a particular type of bond that we offer. A contract bond is a category of bonds that include bond types such as a performance bond, subdivision bond, site improvement bond, and more.

When are Construction Surety Bonds Issued?

Construction surety bonds are usually issued for projects that involve large construction with enormous provisional contracts, and these bonds are often required for government or any other public money projects. The commercial surety bond is issued mostly for the protection of the obligee, but the surety can offer helpful management and operational consulting on behalf of the principal as well.

In the United States, there is a law known as the Miller Act that requires contract surety bonds on all federal projects that exceed $100,000 in amount for the construction, alteration, or repair of any building or public work of the United States. This law requires that a contractor on such a federal project to post two bonds: a performance bond and a labor and material payment bond.

What is Considered in a Contract Surety Bond Issuance?

A contract surety bond is not as quick to obtain as most commercial bonds. However, without it, a contractor could face stiff penalties and fines from the state or other oversight offices. Obtaining a commercial surety bond involves more than simply contacting a surety agency and paying the required fee for the bond. A thorough application process must be completed, and the surety must perform the underwriting process before it will grant the bond and begin the duties of overseeing the contract.

When a surety company performs contract bond underwriting, it takes much more into consideration than just personal or business credit. Your contract bond application will include:

A general information bond application
Business financial statements
The contracting business owner’s resume
Personal financial statements of the owner(s)
Personal credit of the owner(s)
The bond form that must be used to create the original bond

General Bond Application – A general surety bond application is used to help the surety analyze a number of aspects pertaining to the bond. First, it helps determine the bond amount. Contract surety bonds are priced as a percentage of the full contract amount, usually anywhere between 1% and 15%. The more complex the contract and the more duties that a surety must perform, the higher the rate will be charged.

Secondly, the application helps determine the obligee. The application will outline the construction project details and for whom they will be performed.

Also, the general bond application provides the following information for the surety:

The principal’s contact information
Owner’s contact and personal information

A surety may decline an applicant if the information provided is inaccurate. In addition, some sureties may refuse to grant a contract surety bond based on the obligee.

Business Financial Statement: The business financial statements of the applicant usually consist of three to five years of financial results for the contractor. It is one of the most critical items needed by the surety. Financial statements must be submitted as requested by the surety and in orderly fashion.
Owner’s Resume: Sometimes a surety will require additional information regarding the experience and expertise of the contractor. A resume and list of prior projects may be requested by the surety.
Personal Financial and Credit Information: In many cases, a surety will require a principal to indemnify the contract. Indemnification requires the individual owner, as well as the company, to be financially responsible in the case of default on the contract. Thus, the individual’s personal financial and credit information will be used to determine eligibility.

A principal must qualify on all required surety items named above. It is possible that a surety may decline a principal if any of the requirements are not met, or they fail to meet the surety’s underwriting guidelines.

Regardless of the type of construction project, a contract surety bond can offer the peace of mind of an obligee to know that no matter what the contract requirements will be fulfilled to their satisfaction.

Contract Bond Types:

Bid Bond – A guarantee that the bonding company will provide a performance bond if the contractor is awarded the job.

Construction Bond – Is not a bond type, but a general term used to describe contractor bonding.

Maintenance Bond – A contractor bond in force following a performance bond.

Payment Bond – Assures that the suppliers, laborers, and subcontractors will be paid if the contractor defaults.

Performance Bond – A contract bond to guarantee the completion of a project per the terms of the contract.

Site Improvement Bond – Required to ensure public property will be restored upon the completion of a private project, in which the principal owns the land.

Subdivision Bond – Local authorities require a guarantee that the landowner completes mandatory public improvements that builders & developers make to their property.

Supply Bond – Required by the project owner, state or federal law to secure payments to suppliers.

The term “construction bond” is a general term used to describe contract bonds. A contract bond is not a specific class of business, it is a category of bond types including: performance bonds, subdivision bonds, construction bonds and more.

Current Market: The construction bonding market is the same as the rest of the surety industry, making use of conservative underwriting methods. Around 1999-2000, the industry as a whole was very liberal, as the bonding companies’ appetites grew too large. The aggressive underwriting resulted in historical losses, which is what brought the industry to more traditional underwriting techniques today.

Special Markets: Our agency has the capacity to place large contractors with some of the most well known carriers in the country. We can also write the hard to place bonds with our unique niche markets that most agents do not have access to. Please use this application if you were told by us Download Contract Quick’n Ez