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A construction surety bond works just like any other payment or performance surety bond. A project owner (known as an obligee) will require construction companies (known as principals) to submit bids to perform work on a project. Certain projects, mainly publicly funded projects, require bidding contractors to post a bid bond when submitting their bid proposal. The winning bidder would then be required to post a type of construction bond for their part of the project. If the principal completes the project according to the contract then the surety bond will no longer have effect. However, if a claim is filed against the principal then the surety company will investigate the situation. For more information about construction bond claims, please read below.
There are a number of factors involved in determining one’s bondability. In the surety industry, all of the variables fall into three categories: Capacity, Credit, and Character. Together they are called the 3 C’s. Every surety is different and therefore puts different weights on each of the C’s. Luckily The ProSure Group has relationships with over 30 of the largest surety companies. So, no matter what the situation may be, we will be able to help establish a bonding program.
Building bond capacity is obviously easier said than done. This process takes time, start small then work your way up. Begin the process by seeking the professional advice of a reputable surety bond producer that can guide you through the different stages of bonding. Next, start bidding on smaller projects with contracts that are less than $300,000. There are two reasons for this. The first is because projects of this size do not require a review of financial statements but instead only require a credit check. The second reason is because no surety will provide more bonding than that without having an established track record of good performance.
Next, after having gained experience and a good record of performance by completing a few smaller projects, you must hire a construction CPA to prepare your corporate financial statements. Once your bond agent feels the statements are sufficient for larger jobs they will then submit the documents to a surety for underwriting. If your agent did their job correctly then the surety will approve an increase in the bond line. This cycle then continues. As you complete more projects and build your financials, they are submitted for review and your bond line increases, allowing you to bid on larger projects as well as giving you the ability to work on a greater amount of projects at once.
There are many reasons as to why a surety company might decline a contractor. Some of the reasons include weak business financials, a lack of industry experience, or credit issues such as defaults, liens, judgments, or bankruptcies. A surety may also decline to offer bonding to a construction company that has previously had another surety pay a claim on their behalf.
If surety bonds are required, most contract packages will include the obligee’s surety bond forms. It is extremely important to review these forms as not all surety bond forms are the same. If possible, The ProSure Group recommends using bond forms provided by the American Institute of Architects (AIA). AIA bond forms are industry standard forms that were created in collaboration with a number of industry professionals including contractors, attorneys, surety bond producers, engineers, and insurance agents to represent fair and balanced interests for all users. The ProSure Group has the AIA A310-2010 Bid Bond and the AIA A312-2010 Performance Bond and Payment Bond documents on file for your use.
Project owners, called obligees, require contractors to post surety bonds. In the private sector this is optional, but recommended, and solely based on the discretion of the obligee. In the public sector contract bonds are required by law. The Miller Act requires a contract bond on all federally funded projects valued over $150,000. Most states and local municipalities have enacted similar laws that require contract bonds on publicly funded projects valued over certain amounts. These state and local laws are known as Little Miller Acts.
There are a few types of work that surety companies in the United States won't write bonds for. In most cases, the types of work involve too much risk and are just plain unpredictable.