What are the Types of Surety bonds?

The three most common types of surety bonds are: Bid Bonds Performance Bonds Payment Bonds

Are Surety Bonds paid monthly?

No. You don't pay month-to-month for sureties. When you are quoted a price for a surety bond, you make a one-time payment.

How do I apply for a surety bond?

Applying for a surety bond, no matter the sort of bond, is to contact a surety agency. For instance, you can reach CSBA here to get started on obtaining your surety bond.

What is a payment bond?

A payment bond ensures that all of a contractor’s laborers, subcontractors, and suppliers are paid on a particular project.

Who requires payment bonds?

Payment bonds are required on almost all public projects. General contractors sometimes require them of their subcontractors, and occasionally private owners will require them.

Who pays for a payment bond?

The contractor, or principal, purchases the bond and pays for it.

Do Payment bonds expire?

Payment bonds expire after the project is completed and statutory timeframe have lapsed.

What is the difference between a surety bond and a payment bond?

A payment bond is a type of surety bond. The only real difference is the qualifying term, in this case, it's "payment" and only notes what sort of surety bond it is.

What does a performance bond cover?

The performance bond covers the owner of the project against losses if the contractor fails to deliver on the project within the contractual provisions.

How long does a performance bond last?

Since performance bonds guarantee the completion of the contract, they last until the project is finished along with any required warranty period included in the agreement.

When can you release a performance bond?

Usually, a performance bond is released when the project is completed, though some public projects stipulate that a contractor gives a warranty following completion that the performance bond covers.

What is the difference between a performance and a payment bond?

We have a detailed article that explains the differences here , but the short answer is that the performance bond secures the contractor's promise to complete a job within the terms and conditions outlined at the agreed price while the payment bond protects subcontractors, vendors, and laborers against nonpayment.

What is the difference between a bid bond and a performance bond?

Bid bonds are required when contractors bid a project and guarantees if they are low bidder, they will enter into the contract and provide any required performance and payment bonds. Performance bonds guarantee the actual performance of the work to be completed by the contractor according to the terms of the agreement. What happens to a bid bond after a contract is signed? The bid bond is replaced by a performance bond if the bid is accepted and the contractor enters into a contract with the owner or general contractor.

3 Things Contractors Can Do to Increase Bond Capacity Immediately

Increasing your bonding capacity provides you with the ability to bid on larger and larger jobs, increasing the growth of your company and furthering your success. How to increase your bonding capacity is where many contractors get lost, which is understandable as there can be a lot of moving parts to consider.

There are three things you can do to increase your bonding capacity immediately without a deep dive into the accounting profession. Each tip is broken down into specific actions you can take where you’ll see your bonding capacity expand in just 90 days and is suitable for contractors newer in business or more seasoned.

Strengthen your Company’s Financials

The first thing a contractor can do to increase their bonding capacity is to strengthen your company’s financials. How you do this is two primarily twofold:

Limit your fixed asset purchases like equipment or real estate
Retain earnings in the construction company

Some contractors struggle with the first tip as the equipment is needed to perform the jobs for which you’re trying to get bonded. To avoid any confusion, there is nothing wrong with buying equipment. This point is meant as you should consider weighing the need for the new equipment against the need for working capital to support your company’s bond program. Every dollar that is used to purchase a fixed asset, like new equipment, will lower your working capital and can reduce your overall bonding capacity.

The second point is directed at retaining profits in your company, which can come across as obvious, but is worth stating. It’s important to remember that the biggest investment you can make is in yourself and your business, which means avoiding the temptation to invest in other assets personally. Every contractor wants to reap the benefits of their hard work, which comes in time. It is just important to prioritize the company’s financial strength first, because it is the Golden Goose that, with the necessary bonding capacity, will allow you to grow your profits. Having the right surety agent can be a great guide in this area, to better prepare for applying for a greater-sized bond.

Bond Calculator

Use this free bond calculator to calculate your total surety bond cost!

Improving your Financial Reporting

The second thing a contractor can do to increase their bond capacity is to improve their financial reporting. While it’s tempting for many contractors to not want to invest too much time or money into this area, it’s imperative you do to increase bonding capacity:

Use a construction-oriented CPA
Get a CPA financial statement
Improve your ability to produce accurate internal financial reports
Increase your bank line of credit

Beginning with the first point, construction accounting is a unique area and requires unique knowledge and experience. If you are working with an accountant, whether internally or externally, be sure their expertise is in construction. A CPA is an important person to have as a resource and the right surety agent can help pair you with a construction-oriented CPA.

Piggy-backing off the first point, having a CPA financial statement is ensuring your statements are without mistakes and presented fairly. It’s akin to having paperwork notarized, in that having your financial statements prepared by a CPA means they’ve been done correctly and give an honest view of your finances to a surety.

Improving your ability to produce accurate internal financial reports is taking the time to invest in having quality internal financials. We have written an article that explains this in-depth and that you’ll find very useful for saving money and increasing bonding capacity:

How Investing in Quality Internal Financials can Increase Bonding Capacity – CSBA

Increasing your bank line of credit is a big help in increasing bonding capacity, as studies show that more contractors fail during an expansion due to running out of cash. Increasing your access to money helps a surety be more comfortable with your growing bond capacity needs. If a bank line of credit isn’t an option, then a home equity line can help in this regard too.

Working with the Right Surety Agent

Not all surety agents are the same. Some sureties are best at working with newer construction companies while others only take the more seasoned contractors or specific types. In either case, a surety agent can help match you with the surety that best fits your situation. Having the right guide in a surety agent quickens all the steps above and prevents missteps during the bonding process as well. Just like having a construction-oriented CPA, you want a surety agent that is well-versed in your unique situation.

To help you decide if a surety agent is doing right by you and your goals, we recommend reading this article on how to determine if you are getting top-notch service from a surety agent:

4 Ways to Determine if You Are Getting Top-Notch Service From Your Surety Agent – CSBA

While having the right surety agent by your side will help with the other steps to increase your bond capacity immediately, these steps can be taken on your own. It’s important to us at CSBA that contractors who build California become more knowledgeable on the financial areas of our industry, and help contractors understand the different aspects of the contractor business that can better help them succeed.

We at CSBA have extensive experience and knowledge working with both newer contractors and the more seasoned businesses to grow their bond capacity, guiding them to largerbids, and securing continuous success. We are committed to providing the best possible service to our clients and investing in your company’s needs while being upfront regarding challenges you may face.

Take action now to increase your bond capacity, each step above is doable today, and with the right surety agent, like CSBA, your bond capacity has no end for growth in sight.