Construction Surety Bonds
Embroker helps you get surety bonds, needed as a guarantee to a governmental agency, stating that the hired contractors will perform their duties according to the contract signed for the particular construction project.
We wrote this guide to help you, the reader, understand both the basics of surety bonds as well as some more advanced considerations. Our hope is that you walk away from this article a more empowered buyer, with a better understanding of the risk you can transfer to other parties via surety bonds.
Once a surety bond is secured, you are responsible for performing your job according to what is expected of you and your company based on the agreement that was signed. If you fail to live up to your end of the bargain, a claim can be made against you or your company. And if this claim is proven to be true, then the company backing your bond (the surety) will pay out the amount of the bond to the third party that filed the claim against you.
Is this a type of insurance? Surety bonds are similar to insurance policies, but not exactly the same thing. While insurance policies provide coverage in the case of claims and will cover defense costs and possible payouts and other expenses, surety bonds are more of a financial guarantee that you are taking out for yourself and your company.
Securing a surety bond is more like taking out a loan to guarantee the quality of your work and your company’s level of professionalism.
What Are Surety Bonds?
A surety bond is a legal agreement between three parties: an obligee, a principal, and a surety. In this equation, your company is the principal and the obligee is the party that requires you to secure the bond; typically a government agency.
The surety bond is a guarantee to the obligee that you will perform your duties in accordance with what is being asked of you in the agreement. The surety bond will protect the third-party that is hiring you to complete a project from any possible losses that would result from your company failing to make good on what was promised in the terms of the agreement.
If this does occur, the third party can file a claim and receive compensation for these losses.
To recap, the obligee is typically a government agency that uses surety bonds as a form of regulation and requires the principle to secure the bond in order to get a license or permit for their work. The principle is the business that needs to obtain the bond in order to get a license or permit to begin working on a project they have been contracted to complete. And finally, the surety is the bonding company that takes the risk over from the business by backing the bond financially.
What Is a Construction Bond?
As mentioned previously, the construction industry is one of the most common examples of an industry in which surety bonds are absolutely mandatory. With the recent resurgence of the construction industry in the U.S., the current climate is making it easier for professionals to secure the right surety bonds for a realistic price. According to this Willis Towers Watson report, “greater surety capacity than ever is putting downward pressure on rates and improving underwriting conditions for buyers.”
Commonly referred to as “construction sureties” or “building bonds,” the surety bonds for this industry represent a contract that the construction company or contractor signs as a guarantee protecting against a number of possible unsatisfactory outcomes for which the company could be responsible, including a failure to satisfy specifications or finish the project on time. And as anyone who works in the construction industry knows, it’s a high-risk profession in which not everything goes according to plan all the time.
Even though we often consider surety bonds to be a one-way street in which only the principal is held responsible, that’s actually not true. All parties can potentially breach the agreement if either party goes against the terms that have been specified.
Types of Construction Bonds
There are a variety of construction bond types that companies and contractors can secure depending on the specific needs of the project in question. Usually, there are several types of construction bonds that are needed during the course and progress of a project; specific guarantees that need to be made in each phase of the project.
Contractor License: This is the bond that a construction company or contractor must buy at the state, county, or city level before being able to work on any projects.
Bid Bond: The contractor will need this type of surety bond to guarantee that the financial aspects of the bidding information are accurate and that the company or contractor is ready to work on the project if the bid is awarded to them.
Construction Performance Bond: This bond guarantees the contractor’s commitment to carrying out the project in full according to the contract signed between them and the investor.
Payment Bond: This bond guarantees that all subcontractors and workers who will be involved in the project will get paid what they are owed and on time.
Maintenance Bond: This bond guarantees the quality of both the materials that will be used to complete the project and the workmanship itself. If the investor files a claim stipulating that necessary repairs are needed, this bond can cover those costs.
Utility Bond: This bond guarantees that the construction company will pay its utility bills on time and in full.
Supply Bond: This bond guarantees that the materials being used in the construction project will be of the quality that was stipulated in the contract.
Subdivision Bond: This bond requires contractors to build or renovate structures that are referred to as “public subdivision structures.” This includes wastewater systems and sidewalks, among other things.
Why Do Construction Companies and Contractors Need Surety Bonds?
The answer to this question is quite simple: If you don’t secure a construction bond, you’re not going to get any construction project contracts.
The obligee needs assurances that the construction company will fulfill all necessary business practices. If these assurances do not exist, the obligee cannot allow the construction company to work on any projects.
If there is no surety bond, there are no guarantees that the architect, engineer, or construction workers will obey any of the building sector rules of the state, city, or county in which the project is going to be built.
Highly-Publicized Examples of Surety Bonds at Work
- The Sacramento Kings sued their downtown hotel tower general contractor, claiming mismanagement caused the project to soar as much as $50 million over initial budget estimates.
See: Kings sue contractor over soaring costs at unfinished downtown tower project
- Contractor Nickles Wolfe and his wife filed for bankruptcy after alleged victims in five Texas counties claimed that they made payments to Wolfe for construction work only to have him abandon the jobs before the projects were completed properly.
See: Hill Country contractor files for bankruptcy as cases against him build
- Flagler County, Florida won a lawsuit against unlicensed contractor James Cigler, also known as “The Gutter Guy,” who took money from an elderly Palm Coast woman for work that he did not complete and that was otherwise “substandard.”
See: Flagler County wins lawsuit against unlicensed contractor
- This case involved a partial termination of a subcontractor by a prime contractor and a countersuit by a surety against a contractor. Hunt Construction Group tried unsuccessfully to tap a performance bond for a mechanical subcontractor that Hunt replaced in 2016 on the Fairmont Austin Hotel in Austin. Liberty Mutual refused the claim, Hunt sued in April 2017 in federal court in Austin, and Liberty Mutual countersued.
See: Surety Disputes AECOM Hunt’s Claim on Austin Hotel Subcontractor Default
How to Secure a Construction Surety Bond
The first step every contractor or construction company must to take towards securing a surety bond is to make sure that they know which type of surety bond or bonds they need for the project in question. Make sure that you know the bonding amount as well. Regardless of whether you were awarded the project or not, be sure to provide the bid results to your bid agent.
If you are awarded the project, you need to look into what other surety bonds you’re going to need. Most likely, the next one you’ll need will be a performance bond. It’s very important to make sure all of the information on your bond is correct, so double check everything not only while applying but also when your bond arrives.
Once you have received your bond, you need to file it with the obligee. When you complete the job, you need to also make sure that your bond agent is aware of that fact in order to free up your bond line.
Finally, when the project is complete, see if you need any other bonds, such as a maintenance bond, which is sometimes required by the obligee that requested the bid and performance bonds. If you do end up securing a maintenance bond as well, make sure that you make all of the necessary repairs in the time period during which the bond is active.
Surety Bond Costs
The price of your surety bond will depend a lot on the conditions of the agreement or contract that the bond is going to cover. Surety companies look at many factors when determining premiums but will pay special attention to your credit scores. As we mentioned earlier, surety bonds are more similar to loans than insurance policies.
If you have an excellent credit score, expect to pay in between 1-5 percent of the bond amount. Companies with poor credit scores could pay as much as 20 percent of the bond amount. To put this into numbers and get a better idea of premiums, if securing a $50,000 surety bond, a construction company with good credit can expect to pay in between $500 – $2,500 while a company or contractor with poor credit could pay as much as $10,000.
Now that you have a better understanding of the basics of applying for and securing surety bonds, you may be wondering where to go from here. If you need more help or information, you can reach out to our team of expert brokers. If you prefer to get started on intelligent quotes, create your Embroker account today.
Surety bonds are an integral part of business, especially in the construction industry, but in many others as well. They provide customers or investors with protection from service providers who don’t meet their expectations. They also allow business owners to protect themselves and their reputations in the case that something that doesn’t allow them to meet expectations occurs during the course of the project.
If you want to be competitive and land the best jobs for your company, you need a surety bond, plain and simple.
Getting the right surety bond for the right price isn’t a given, however. Furthermore, the language of the bond tends to be very legal and complicated, making it imperative for you to have an expert guide you through the process.
According to a recent report by Surety Bond Quarterly, 73 percent of interviewed contractors said that “difficult owner contract language” places additional risk on projects where profit margins remain thin.
Embroker is the easiest and quickest way to intelligently obtain surety bonds for any business. We’re here to help! Get started by creating an Embroker account or reach out to our team of expert brokers. We’re here to help!