A Payment Bond is required on many construction projects. In the construction industry, most Payment Bonds are issued in conjunction with a Performance Bond. The Payment Bond forms a three-way contract between the Owner (obligee), the contractor (principal), and the Surety company. The Payment Bond guarantees that all sub-contractors, laborers, and material suppliers will be paid, which results in a lien-free project. A Payment Bond request, that doesn’t simultaneously require a Performance Bond, typically results in much less premium than having both types of Bonds issued.
In general, Contract Bonds provide financial security to the project owner and, in most cases, are required before work on a project can begin. Contract Bonding is a category that covers multiple different bond types including Bid Bonds, Payment Bonds, Performance Bonds, Supply Bonds, Maintenance and Warranty Bonds. Each type of Contract Bond covers protects the project owner (obligee), and the general public, in its own unique way.
What Is Needed To Apply for a Construction Bond?
Not everyone can qualify for a construction Bond, as Surety Bonds are a form of credit, not insurance.
Underwriting guidelines vary, depending on the size of the project. Smaller projects ($350k and under) are primarily underwritten based on the owners’ personal credit. However, underwriting for larger contracts is more extensive. Please see below for a detailed explanation of what is required for larger construction Bonds.
|Project Size – Less Than $350,000||Project Size – Greater Than $350,000|
What do performance and payment bonds cost?
Rates are based on a percentage of the total contract amount, not just the bonded portion of the contract (if it varies). Example: The contract amount is $100,000. The rate you qualify for might be 2.5%. The premium due will be $2,500.
I have bad credit. Can I get a payment and performance bond?
Typically, no. Smaller contractors are underwritten based solely on personal credit and there are not insurance companies available to support high risk payment & performance Bonds. Larger contractors, with strong business financials and appropriate experience, can get approved should the owners have credit issues.
When do I need a payment and performance Bond?
A Payment & Performance Bond is needed when you are awarded a contract with payment & performance bond requirements. If the contract required a bid bond, a payment & performance Surety Bond will usually be required after.
My business is new. Can I get a Surety Bond?
Yes. You will be able to acquire smaller Bonds with adequate personal credit history.
Why do you need my spouse’s information?
Your assets were merged upon marriage. With Surety bonding, you are corporately and personally responsible for repayment of Surety Bond claims. Therefore, the Surety requires your spouse to personally guarantee your company. In addition, if your spouse is unwilling to provide a personal guarantee, it will cause conflicts in the underwriting process and may result in a negative outcome.
How To Qualify For Larger Construction Bonds
Hiring a construction CPA is important when trying to qualify for a largeer contractor performance bond (Greater than $350k). The business financial statement is the primary item Surety Companies will review when determining the Bonding capacity that will be offered to the contractor. If a CPA unfamiliar with construction accounting is used, statements will likely be improperly prepared, which will cause issues during the underwriting process. It is important to speak openly with your Bond Agent and CPA about your Bond limit goals, so that expectations are properly set.
Working with a proficient Surety Agent is also crucial. Surety Bonding is a highly specialized field and the experience of a standard P&C insurance agency may be insufficient for your needs, unless they have dedicated Surety experts on staff. Skilled Surety Agents have direct access to the best insurance companies, which means they can provide the lowest rates and the highest quality of support. They also can work directly with a CPA to ensure the contractor being reviewed is presented properly.
Large performance Bonds are fully underwritten, which means that the contractor’s business financial statements, experience in the construction industry, banking records, references, personal credit, and personal financials will be reviewed.