Construction Performance Bonds

When it comes to surety bonds, protection for the work you do and the money you’re owed is important. Sometimes filing a bond claim can be a tedious and confusing task, especially if you’re not familiar with the bonding process.

Whether you’re new to performance bonds or would like a deeper look into the system to see how you can use it to your advantage, check out this information to ensure you’re on the right track.

Higher Bonding Limits Yield Bigger Contracts: Are You Prepared?

As a contractor, you probably already understand the need for bonding. What you might not realize is that the key to growing your company and bidding on bigger jobs is based on your ability to qualify for higher bonding limits. Good credit and strong financials are important steps in securing bonds for the bigger projects. If you aren’t adequately set up in advance, the bond won’t be there when it’s time to bid, which can stall the growth of your company.

By having good credit, strong financials, and a solid business plan, you can obtain higher bonding limits and take on bigger projects that will expand your business. So what should your business plan include?

• Anticipate future capital demands.
• Be able to meet those demands. Having a steady revenue stream will help.
• Proof that your organization is able to execute the work you have now and in the future.
• A thorough understanding of current marketplace conditions and your competition.
• A SWOT analysis – your company’s strengths, weaknesses, opportunities, and threats. This includes your financial position.

It’s also strongly advised that you partner with the right surety agent. Having the right agent who has a vested interest in your success will provide meaningful value to your company. For the “right agent”, you’ll need someone who will help you attain your bonding goals and who:

• Understands underwriting and what is important to the surety. 
• Values a long-term relationship with you and stands by you through market fluctuations and changes in your own business.
• Has a strong track record in the surety industry, which will give you automatic credibility as a contractor.
• Has access to choices in the sureties that you are exposed to.
• Periodically assesses your current financial position and what your capital and cash flow needs are for the near future. 

An important aspect of working with your agent is communication. Having open conversations with your surety agent will give your business a stronger chance to grow. Here are some tips to follow when communicating with your agent:

• There are many different channels of the bonding process; you have to make sure you are actively communicating your information to all the decision makers in order to succeed.
• Invest the time you need to communicate your plan to the surety company.
• Keep the surety aware of any challenges your company is facing. Transparency is key to a strong relationship.
• Make sure your plan is clearly communicated to the decision makers at the surety firsthand. Don’t assume this is being taken care of.

Retain Capital in Your Business

Most businesses tend to leave the least amount of money in the company, but in the world of public bonded contractors, the opposite is the rule.

• Long story short, it’s hard to bond a job when there is not enough money in the company.
• By leaving as much capital in the company as you can, you are positioning your organization as a stable business that will be around long term.

There is a clear line between having the proper bonding levels in place and your company’s growth. The reason for this is that the bonding industry has studied the construction industry for hundreds of years and the things they require of a contractor are typically the things needed to grow and run a construction company properly.

By continuing to have the proper revenue streams and agents, you’ll be able to qualify for higher bonding limits. To do otherwise is to leave money on the table—and no one can afford to do that in the construction business environment.

Definitions

Need a refresher on some of the different types of bonds used in the construction industry? Check out this list to help you understand the different bonds that are available to you.

Surety Bond
A surety bond is a three-party legally binding agreement between an obligee (project owner), a principal (contractor) and the surety bond company. It guarantees to the project owner that the contractor will carry out their performance and payment obligations in accordance with the terms specified in the agreement. The surety bond is put in place in order to protect the public, other stakeholders, and the obligee. 

Bid Bond
Bid bonds are surety bonds which are used as security on bids submitted on a contract. Bid bonds guarantee that if a contractor is awarded the contract, they will execute the contract at the specified bid price. Most government and private sector projects require a bid bond.

Performance Bond
Performance bonds guarantee that a contractor will adhere to the terms and conditions specified in the construction contract. Once the contractor is awarded the winning bid and receives a contract, the contractor will need to provide a performance bond. In most cases, the performance bond and payment bond are issued in conjunction with each other.

The performance bond is designed to protect the project owner in the case that the contractor does not meet scheduled project timelines, unable to complete work on a project, or other non- performance issues. In the case of a legitimate claim being brought up against a contractor, the surety company will intercede and settle the claim.

Payment Bond
Typically required in conjunction with performance bonds, payment bonds are contract bonds that guarantee subcontractors and material suppliers will be paid. This agreement is usually made between the contractor, project owner, and the surety bond company. 

If the contractor doesn’t compensate the subcontractors, material suppliers or others in a timely fashion then a claim can be filed against the bond. The surety company would then remedy the outstanding financial obligations.

Maintenance Bond
A maintenance bond, or warranty bond, is a contract surety bond that protects the owner of a construction project for a specified period of time after the completion of the project, mainly to protect against defects and faults in the structure. These types of bonds are required for public construction projects, but are optional for commercial and private.

And that’s all you need to know about the bonding process! If you’re looking to find an agent that will help your business grow, look no further. Our surety bond specialists have been responsible for issuing surety support for approximately $100 billion worth of construction contract values. 

We provide more creative options and flexible negotiation terms for projects to allow you take on the kind of jobs you want.