A Guide to Surety Bonds for Newer in Business Contractors
Congratulations on starting your own construction business! Depending on what type of construction work you do, surety bonds can play a huge part in your business. Bonding can open doors and bring your company to the next level or it can be a roadblock to your growth if you aren’t prepared and set up with the right surety partners.
Whether you are still in the planning stages of your business, just got it off the ground, or are a few years in, this comprehensive guide will give you everything you need to set yourself up for success.
A Guide to Surety Bonds for Newer in Business Contractors
Below you’ll find answers to commonly asked questions newer contractors have about establishing a bond program or growing their bond limits to achieve their goals.
Types of Surety Bonds
The first thing to understand is the surety bond types themselves, what they do, and what they are for.
Bid Bonds
In the state of California, all public construction projects require a bid bond to be submitted along with the bid. While private projects aren’t required by law to demand a bid bond, some privately owned projects do. General contractors also sometimes require bid bonds from their subcontractors. A bid bond protects the owner of a project or a general contractor during the bidding process, guaranteeing that the surety will compensate the project owner if the bidding contractor fails to enter the contract or does not provide the performance and payment bonds required.
Payment Bonds
A payment bond guarantees that subcontractors, laborers, and material suppliers are paid according to the terms of a contract and are standard requirements for both public projects and general contractors when qualifying subcontractors.
Performance Bonds
Performance bonds guarantee that the contractor will complete the work and meet the contractual obligations outlined with the owner or general contractor on the project.
Performance Bonds
Performance bonds guarantee that the contractor will complete the work and meet the contractual obligations outlined with the owner or general contractor on the project.
To learn more about performance bonds in detail, we encourage you to read here.
Bid Bond
In the state of California, all public construction projects require a bid bond to be submitted along with the bid. While private projects aren’t required by law to demand a bid bond, some privately owned projects do. General contractors also sometimes require bid bonds from their subcontractors. A bid bond protects the owner of a project or a general contractor during the bidding process, guaranteeing that the surety will compensate the project owner if the bidding contractor fails to enter the contract or does not provide the performance and payment bonds required.
To learn more about bid bonds in detail, we encourage you to read here.
Payment Bond
A payment bond guarantees that subcontractors, laborers, and material suppliers are paid according to the terms of a contract and are standard requirements for both public projects and general contractors when qualifying subcontractors.
To learn more about payment bonds in detail, we encourage you to read here.
Where to Secure Construction Bonds
Many newer contractors go to their insurance agents for surety bonds. While an insurance agent can get a surety bond for you, it isn’t always the best choice; it’s similar to seeking a foot doctor for shoulder pain, they are both doctors but with different specialties. There are significant differences between a surety agent and an insurance agent that failing to appreciate, can cost a contractor opportunities to grow their new business and their bonding capacity.
Insurance Agent vs. Surety Specialist
The key differences between a surety specialist and an insurance agent include:
- Professional background and approach: An insurance agent’s education and experience is tied to insurance policy language and forms to protect against risks. Surety agents are more focused on construction accounting and financial benchmarks, which are an important part of the bonding process. Surety agents also have deep understanding of best practices related to job specific risks, which are areas insurance agents aren’t intimately familiar with.
- Industry relationships: Surety specialists have meaningful relationships with surety companies, which helps to match your bonding needs with an appropriate bond provider based on your unique needs. An insurance agent may only work with 8 or 10 sureties whereas a surety specialist can work with over 35 surety companies. More sureties equal more options.
There are several details and other information regarding why a contractor, especially a newer one, should seek out a surety specialist over an insurance agent. We strongly recommend you read here:
Bonding Process
When a contractor sets up a bond program with a surety, the surety will look to understand the following:
- The contractor's experience
- The financial strength of the business and owners
- The track record of the contractor
- The operational capabilities of the company
Applying for any surety bond typically follows these steps:
- Find a quality surety expert, for information on how to determine the right surety agent to work with we encourage you to read here: 4 Ways to Determine if You Are Getting Top-Notch Service From Your Surety Agent
- Gather the documentation and information required for the particular surety bond needed to begin the underwriting process
- Fill out the bond application
- Sign the Indemnity Agreement that states the principal (applicant) agrees to pay back the full amount of the bond if a claim is filed against it
- Pay the premium for the surety bond
- Submit the bond to the appropriate parties
How long does the approval process take?
Assuming the surety bond application was submitted with the required documentation and information, the turnaround time for the surety application is as little as 24 hours for bonds under $750,000. Larger bond programs can take a few days to a week, but the wait can be extended if the underwriter doesn’t receive the right information.
There are ways a newer construction business can avoid common bumps in the road during the application process by working with a surety agent that has extensive experience with newer contractors.
We at CSBA are one of the few surety experts that work with newer contractors and take pride in helping them grow their businesses while educating them on the opportunities that increasing bonding capacity offers. To assist California contractors in achieving their business goals, we help you step-by-step by providing the resources. We have construction accounting experts that can help you set up your job costing, implement accounting software, and train your staff. They are available for the initial setup and on an ongoing basis if needed. We also work closely with several construction CPAs, and when your company is ready to take that step, we can guide you to these professional advisors.