There are many different types of bonds, but of these Contract Bonds are the ones of most interest to contractors bidding public works projects. Contract bonds are also increasingly be required of subcontractors by larger generals, often at the direction of the general contractor’s surety company. Basically these guarantee the performance and payment of obligations under a construction contract.
The three associated types of bonds are bid, performance and payment bonds.
A bid bond acts as a prescreening device and guarantees to the owner, or Obligee, that if awarded the contract, the contractor, or Principal, will enter into the agreement and provide any performance and payment bonds required. In the event the contractor fails to do so, the bid bond covers the difference in amount bid between their low bid and next higher one up to the bid bond amount, which generally ranges from 5 or 10% for municipal, county of state work to 20% for federal projects.
Once a contract is awarded, the contractor is generally given 10 days to present the performance and payment bonds. These can be written separately or combined on a single bond form, but cover two distinct obligations. The performance bond guarantees that the successful low bidder will perform the work according to the specifications and time schedule provided in the plans. Failure to finish the work by the stated completion date often triggers a liquidated damages clause under which the contractor must then deduct a per day pre-agreed upon dollar assessment from the contract price for delays in completion.The payment bond guarantees that the contractor will pay legitimate billings from subcontractors and suppliers, thus delivering a lien-free project to any private owner, and taking the place of liens on public works on which these cannot be placed.
As a result of the downturn in housing, many residential contractors have been forced into the public sector, driving prices down, often below cost. This has combined with restricted bank credit to produce increased contractor failures and a tightening in the surety industry. Contractors who trust their insurance agent to handle their bonding are often experiencing difficulty obtaining the bonding
capacity they need to operate profitably.
Jim Ewald has over 31 years experience specializing in bonding. He can offer a wide variety of bonding solutions through several different bonding companies and has helped contractors of all sizes increase their sales and profits over the years. Contact Jim at (503) 445-8404 for more information or help with any bonding needs.