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.

The Pros and Cons of the SBA Bond Program

The Small Business Administration bond program can be a great way for contractors to expand their bonding capacity, but whether it’s the right move for your business is a question mark. As with any program, there are advantages and disadvantages to applying for them. This, of course, depends on the contractor considering applying for the SBA bond program.

Before rushing to an SBA application, let’s go over the pros and cons so that you can make an informed decision for your business.

What is the SBA Surety Bond Program?

The Small Business Administration created the Surety Bond Guarantee Program in 1971 to help small business contractors bid on government contracts by making it easier to qualify for the required bonds. The program accomplished this by aligning with surety companies and giving them guarantees against possible losses, giving the surety providers more flexibility with underwriting, and allowing them to go beyond the normal bonding limits.

To learn more about the SBA bond program and how it helps better your bonding capacity, we encourage you to read the article linked below:

How the SBA Bond Program Can Increase Your Bonding Capacity – CSBA

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SBA Bond Program Cons

It’s always better to know the cons before focusing on the benefits of any decision, that way you approach the choice with the potential downsides clearly in mind. Below are the disadvantages of the SBA bond program:

The SBA has its own fee of 0.6% of the bond amount on top of the premium charged for the bond by the surety company. Though additional costs are typically not ideal, the greater bonding capacity and profit opportunities that arise from it, may make the extra charge worth it.
Every time a contractor needs a bond through the SBA, they’ll need to fill out an extra form. Most of the information is prefilled from the first time, but the specific information of the job is required to be updated.

Depending on which of the plans under the SBA bond program is used, there can be limitations. For example, the SBA generally limits bonding jobs more than 1.5 times the contractor‘s largest project completed, or when bonding annual indefinite quantity contracts, the contract must be renewable by mutual agreement. For this reason, it’s important for a contractor to work with a surety agent who is well experienced in the SBA bond program. With a qualified agent, the contractor can discuss their goals and the agent can ensure the contractor is in the right program to better achieve them. The SBA Bond Guarantee has many exceptions to rules, and for that reason, it can appear as a complex.

SBA Bonding Program Pros

There are several advantages of applying to the SBA bond program that can greatly help contractors both seasoned and newer in business:

The SBA bond program usually provides double the bonding capacity that a standard surety company will. This is primarily due to the more lenient underwriting terms that are geared towards helping contractors grow their companies.
The SBA can write single bonds up to $6.5 million and technically have no limit on the total amount of bonds that they can provide at once. While there is a cap on the single job size ($6.5 million), they can issue as many bonds as they’d like per contractor.
The SBA gives contractors a lot of room for growth, for example, a general building and civil engineering contractor can have an average revenue of up to $39.5 million while trade contractors can have up to $16.5 million average revenue.
If working with a surety agent that is well-versed in the SBA bond program, their experienced service and responsiveness are equal to that of standard surety providers. An experienced surety expert will be able to guide a contractor through either plan used in the SBA:
- Plan A: The surety agents go directly to the SBA for underwriting and the surety provider signs off. In this SBA plan, there are very specific guidelines that must be followed which is why an experienced surety agent is necessary.
- Plan B: The surety itself does the underwriting, where they have more discretion.

SBA Application Guidance

surety expert can greatly help contractors navigate the process. We at CSBA are experienced in guiding California contractors, both newer and seasoned professionals, through the program and taking advantage of the growth it can produce. Due to both our background and understanding, we are able to do the heavy lifting and ensure the best outcome if you choose the SBA bond program to help grow your bonding capacity.

If you’re weighing the advantages and disadvantages of the program, don’t hesitate to reach out to us to help you decide if it’s the right choice for your business.

About The Author

Dan Huckabay

President

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