One of our main objectives here at CSBA is to improve the surety literacy of contractors and help them to operate better. As part of that mission, we felt it was important to write a guide to the types of surety bonds contractors use to secure bids and perform work. While many of these surety bonds are likely familiar to you, it’s important to understand how they work to grow your company and better ensure success as a contractor.
Let’s discuss the main 3 types of surety bonds and some of the more uncommon ones before moving into common questions contractors ask and how to engage your bond agent.
The Main 3 Types of Surety Bonds
While there are several types of bonds contractors need, there are three main ones, which we will start with here.
- Bid Bonds – This type of surety bond protects the owner of a project or the general contractor during the bidding process. What it essentially does is guarantee that you, as the bidder, will compensate the project owner if you fail to enter into the agreement and provide any required bonds. For example, performance and payment bonds are often required following the bidding process.
It’s important to know that all public construction projects in the state of California or any federal project, meaning any project that uses tax dollars, require this type of surety bond. The amount of the bid bond required from the contractor is typically 10% but can be as much as 20%, though you’re likely to see that last figure for more federal projects.
For deeper information on the bid bond surety, please read here: California Construction Bid Bonds – California Bid Bonds – CSBA
- Performance Bond – This type of surety bond guarantees that the contractor performing the work will meet all the obligations agreed to within the contract. The goal of a performance bond is to ensure the work in the contract is finished according to the plans, time frame allowed for, and any other specifications in the contract.
It’s important to know that a performance bond is typically required for 100% of the contract amount and that bond is released once the project is completed. Although, some public projects stipulate that a contractor gives a warranty that the performance bond will cover. Be sure to read the contract and know whether or not a warranty is attached.
For more in-depth information on performance bonds, please read here: California Performance Bonds – CSBA
- Payment Bond – This type of surety bond guarantees that subcontractors, laborers, and material suppliers will be paid according to the terms of a contract. You are sure to see a payment bond required for public projects, and they are sometimes required by a general contractor from their subcontractors. While many contractors consider this type of surety bond like insurance, it’s important to dismiss that idea as the payment bond doesn’t protect the contractor, but benefits the subcontractors, laborers, or suppliers in case they aren’t paid.
The payment bond is usually required for 100% of the contract amount, and the bond ends or expires after the project is completed and the statutory timeframe has lapsed.
For more in-depth information, we encourage you to read here: California Payment Bonds – CSBA
Other Types of Surety Bonds – The 3 types of bonds listed above are the most common and are often required, but there are other types of surety bonds you may run into as well.
- Maintenance/Warranty Bond – Most projects have a warranty period, often one year, and sometimes owners of a project will require a separate bond that ensures the performance bond continues until the warranty ends. This amount of this type of bond varies but is usually less than 100% of the contract amount.
- Supply Bond – This bond is quite similar to a performance bond but limited to situations where there is a purchase of some material or equipment. It essentially guarantees the supplier will provide the material or equipment according to the terms of the contract or purchase order, and is generally required for 100% of the amount.
For guidance on how to apply to any of these bonds successfully, we encourage you to read our guide to applying for a bond here: Your Guide to Apply for a Bond
What to Ask Your Bond Agency During the Process
Overall, each type of surety bond has a similar application process but it’s good to know what to ask your surety agent so that you’re equipped to participate and to ensure it is as speedy of a process as possible.
- How many surety companies do you work with? – This should help you avoid working with general insurance agents, as they usually only have 5-10 surety companies they work with. This translates to a lack of expertise and options.
- Do you have internal underwriters on staff? – Without an internal underwriter on staff, the agent can’t advocate on your behalf and simply becomes a conduit to pass information to the surety company. This drags the process out extensively. It’s better to work with an agency that has underwriters on staff to ensure they are getting all the information needed without a lot of back and forth.
- How can you help my business and bonding capacity grow? – This one is important to ask and can be difficult to answer if the bonding agent isn’t a specialist. When an agency has many contractors, they develop expertise on what it takes for contractors to thrive and build their business. Without that expertise and extensive experience, a general insurance agent can’t add any value to the contractor in the process.
- How do you decide which surety company to place me with? – An inexperienced bond agent will, basically, scroll through their digital rolodex and see “who is available” or simply turn to whoever their “buddy” is. To understand what surety company benefits you best, the agent needs to take a holistic approach and identify the surety company that best suits your unique needs. To do that, an agent needs to have a lot of surety company options, experience, and knowing what each surety is best at.
There are many things to consider and ask a potential bonding agent, which is why we’ve written this in-depth article: The Top 6 Questions You Need To Ask Your Surety Agency
We strongly recommend reading it to help better your knowledge of the bonding industry, protect yourself, and grow your business successfully.
Partner With CSBA To Experience The Difference
You don’t need to be an expert in the types of surety bonds you need to grow your business or bid on projects, but you should partner with those who are. Here at CSBA, we are committed to helping our clients beyond helping them get the types of surety bonds they need for any one job, we want to help them grow and succeed; which means sharing our knowledge and improving their financial literacy. That’s why we write articles like these.
We are always available and happy to help California contractors get the types of bonds they need to develop our great state. Contact us today to talk to one of our surety experts and find out what type of surety bond you need, when, and how to get it.
We invite you to explore the CSBA difference and experience having an expert partner that is devoted to one thing: your success.