Contractor Surety Bonds 101: What Are They and Why Do You Need Them?

Published: Mar 17, 2014

The work of contractors is heavily regulated, especially when it comes to state and federal contracts. Depending the kind of work you do on a project, you’ll be required to have a specific kind of contractor surety bond, or more simply, a contract bond.

In this article, I will look at the different types of contract bonds you might need, but first I want to make an important distinction between а contractor’s license bond and a contract bond. The former is a pre-licensing requirement – without it you cannot operate as a contractor to begin with – and the latter is required before you can start work on a particular project.

Now onto the classification:

 

Image Source: Free Digital Photos

Image Source: Free Digital Photos

Performance Bonds

As mandated by the Miller Act, all contracts valued at $100,000 or above, require the contractor to post a performance bond. A performance bond is needed after a contractor wins a project. It makes sure that they will do their job in accordance with the conditions of the contract and within the specified time frame. In case a contractor defaults and fails to complete a project, the surety must find a replacement contractor as soon as possible.

 

Payment Bonds

Payment bonds often go hand in hand with performance bonds and are sometimes even underwritten together as one bond: a performance and payment bond. Payment bonds protect suppliers, laborers and subcontractors affiliated with the main contract. It makes sure they will receive their payment on time and that it will be equal to the amount set out in the contract.

 

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Image Source: Free Digital Photos

Bid Bonds

A bid bond is required from a contractor during the bidding stage of a project, i.e. before a contract is awarded. It makes sure that should the contractor win the project, they will step into the contract and execute it at the price they put in the proposal. It’s also a way to ensure that the contractor will acquire a performance bond. The good news is that the price of the bid bond can be put towards the whole cost of the project, i.e. the contractor gets bonded for free.

 

Supply Bonds

If you are supplying the materials for a public project, you may need to post a supply bond. A supply bond protects the project owner in case of a supplier default. Thus, if the supplier cannot provide materials as promised, the surety must step in and compensate the project owner. It’s important to note that supply bonds cover only the procurement of materials, but does not concern installation or labor.

Subdivision Bonds

Image Source: Free Digital Photos

Image Source: Free Digital Photos

Subdivision bonds are required on several kinds of public projects – municipal, state or federal. They make sure that the builder (or whoever the principal of the bond is) will make some mandatory improvements during the construction of a subdivision. The improvements are made at the principal’s expense and usually pertain to sidewalks, streets, curbs, gutters, sewers, etc., depending on what local authorities mandate.

Site Improvements Bonds

Site improvement bonds are somewhat similar to subdivision bonds, so the two often get mixed up. The main difference is that site improvement bonds are required not during the building of a subdivision, but for improvements made to an already existing building. This bond also makes sure the installments are not in violation of the building code.

This is only a rough overview of all the contractor surety bonds you might be required to have when  you’re working on public construction projects. If you already know which kind you need, you can start your application right now and get a quote in minutes. For further questions, don’t hesitate to contact us!

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Victor Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he now focuses on educating and assisting small businesses throughout the country with various license and bond requirements. Victor graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan's Ross School of Business.