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TYPES OF BOND
Performance Bond, Payment Bond, Bid Bond - Proposal Bond - Financial Security Bond, Warranty Bond - Maintenance Bond, Supply Bond, Completion Bond, Subdivision Bond - Development Bond - Improvement Bond, Landscaping Bond, Service Contract Bond, Contract Bond - Construction Bond
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Contract Bond - Construction Bond
What is a Bid Bond?
These bonds are usually written at 5% or 10% of the bid amount and are submitted along with the bid proposal. A bid bond simply shows that a contractor has been prequalified for a project and if the contractor is award the project, the bid bond guarantees that the contractor will enter into a contract with the owner. If the contractor fails to enter into the contractor, the 5% or 10% may need to be paid to the owner as damages. Generally, there is no charge for this bond.
What is a Bond Reference Letter?
This letter may be requested by an owner to prequalify a contractor before a contractor can even bid to the owner. This letter simply states that a contractor does have bonding set up, but it does NOT give an approval for a specific project. Generally, there is no charge for a reference letter.
What is a Performance\Payment Bond?
These final bonds are written when a contractor is awarded a project. The performance bond guarantees nearly every term and condition in the contract (e.g. proper workmanship, completed on time, etc.). Whereas the payment bond guarantees that all employee, subcontractors, and suppliers have been paid.
What is a Warranty\Maintenance Bond?
When requested this bond is usually written for 1 year. Unlike product warranties, this bond simply guarantees the “workmanship” of the contractor for a given period of time.
Why are the above contract bonds required by an owner or general contractor?
Contract bonds are required primarily for two purposes: (1) as a prequalification mechanism, and (2) as a loss reimbursement mechanism. From a prequalification standpoint, the bond eliminates quite a lot of burden from the owner in determining whether a contractor has the capabilities to complete the project (e.g. experience, financial resources, equipment, human resources, etc.). Most importantly, contract bonds eliminate a substantial amount of financial and legal risk to the owner by reimbursing an owner for a contractor’s failure and breach of contract.
What information is required to get set up for bonding & how long does it take to get an approval?
Usually, the primary requirements include (1) Questionnaire/Application, (2) business financial statements, and (3) personal financial statement from the owner[s]. If a contractor has only been in business a short time, a resume and company profile may be requested. If a contractor has a bank line-of-credit, a bank reference should be sent in once a year. Although Bond Guarantee Group, Inc. typically approves a contractor in 1 to 3 days – of course, assuming the paperwork is in order – contractors should expect upwards to 5 days for a formal approval.
How much do bonds cost?
Bond rates typically range from .5% to 3% of the contract price. The rates a contractor obtains is dependent upon (1) the qualifications of the contractor, and (2) the type of construction being performed. Also, nearly all sureties have “sliding scale” rates, which means as the contract price gets larger the rates become gradually lower. A contractor’s rates will be given to them before they bid a project, so that the contractor can add the bond costs to the bid price.
What qualifies a contractor for bonding?
There are primarily three factors that determine whether a contractor will be approved and they are (1) experience, (2) financial strength, and (3) financial presentation quality. Examples of other factors, which can be important, include credit worthiness and references.
What does the bonding agent do on my behalf?
Bond Guarantee Group, Inc. represents 15 different bonding companies (surety markets) and negotiates on behalf of the contactor for the best possible rates and level of bonding. Since each bonding company varies in rates, underwriting philosophies, types of contractors they prefer, etc., it’s critical that Bond Guarantee Group, Inc. submit the contractor to those sureties which are a good “fit.” It’s also important that the bond agent understand the underwriting process extremely well, so as to know how to negotiate for the best possible deal, as well as educate the contractor to as to the key areas of concern by the surety – if any.
Development Bond - Improvement Bond - Subdivision Bond
Why is this bond required & What does it guarantee?
When a land investor decides to develop real estate; City and County governments want assurance that the improvements are done according to building code, will be complete, and that the taxpayers are protected (i.e. safety, according to the master plan, and for the betterment of the community).
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