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.

How are Bid Bonds Calculated?

Being that bid bonds are required by law for construction projects using tax dollars, no matter if it’s local, state, or federal, it’s important to know how they’re calculated to ensure that you get the size bond you need. While no one can be expected to be an expert in all things related to their business, knowing the basics of bonds and how surety companies go about calculating a bond program can give you a leg up when required to get a bond for a construction bid.

Read below to learn what bid bonds are for, how they’re calculated, and ways to lower their cost.

What is a Bid Bond For?

Bid bonds are a type of surety bond that provide bid security to a project owner. They protect the project owner by providing financial relief if a contractor pulls out after winning the bid, whether by refusing to enter into the contract or failing to provide the other required bonds, like a performance and payment bond. The bid bond also helps the project owner avoid wasting time and money on unqualified contractors by providing assurance that the contractor has already been prequalified by the surety company prior to the bid. When a surety company approves a bid bond, they are saying that they are willing, in good faith, to provide the performance and payment bond if the contractor is low and awarded the job.

When applying for a bid bond, the surety company will need to determine whether the contractor has both the financial capability to complete the construction job and the experience to do so successfully. There are a few factors that surety companies consider that are important for a contractor to prepare for:

The date of the bid
Financial resources available to complete the job
The contractor’s credit score
How long the company has been in business
The track record of profitable jobs finished, of similar scope and size
The labor and equipment available that will help to complete the job in question

Calculating Bid Bonds

The bid bond amount is easy to calculate. As mentioned previously, the bid bond is a form of bid security. The amount of bid security required is determined by the project owner and will be outlined in the bid specifications, typically as a percentage of the total bid amount. It’s common for this requirement to be in the amount of ten percent of the total amount bid. For example, if the bid security is required in the amount of ten percent of the amount bid, and you’re submitting a bid for $1,000,000 for the construction project, then the required bid bond amount would be for $100,000 (which is 10% of $1,000,000). That being said, it’s important to understand that even though the bid bond in this example is only for $100,000, the surety company will underwrite based on the total bid amount of $1,000,000. Therefore it’s also important to make sure you’re positioned for bonding the total amount of your bid, and not just just the amount of the bid bond.

If you need to increase your bonding capacity in order to be able to bond more than just the required bid bond amount, there are several steps you can take to accomplish this, such as:

Investing in your internal accounting to make sure you have the ability to generate a reliable financial statement and work-in-progress schedule, with job costs that are set up and expensed correctly, and having both revenue and costs posted in the same month they occur. To read more on how to invest in internal financials, we recommend reading here: How Investing in Quality Internal Financials can Increase Bonding Capacity – CSBA
Strengthen your company’s financials by limiting your fixed asset purchases and keeping earnings within the business. This will give you greater capital to be a cushion during the project.
Work with a surety expert so you have a specialist that can guide you through the steps it takes to expand your bonding capacity.
Work with a CPA that is construction-oriented to ensure your financial documentation is accurate and verifiably so.

These are four steps a contractor can take to increase their bonding capacity, therein gaining bid bonds for larger projects. To read more in-depth about increasing your bonding capacity quickly, we strongly encourage you to read here:

3 Things Contractors Can Do to Increase Bond Capacity Immediately – CSBA

Bond Premium Calculator

Use this free tool to calculate an estimated cost for your performance and payment bonds.

How is Bid Bond Premium Calculated?

Now that you know what a bid bond is and how a bid bond is calculated, you are probably wondering how much it costs. Surety companies do not charge a premium for the bid bond itself, but a premium is charged for the bonds that follow. (Remember, the bid bond is guaranteeing that a contractor will enter into the contract and provide both payment and performance bonds when required, if the contractor is low on the bid and if the contractor fails to do so, then a claim will be filed against the bid bond.) Therefore, you need to be aware of what the cost is for the performance and payments bonds, and factor that cost into your bid even though you won’t be paying for the bid bond.

The premium charge for bonds varies depending on the bond program the contractor has prequalified for, and there are several factors that help determine the cost of the bonds that are within a contractor’s control. The easiest way to lower surety bond premiums is by working with a surety agent who can guide you in taking steps to lower the price. To read more on how to lower bond premiums, we strongly encourage you to read here:

How to Best Position Yourself for the Lowest Surety Bond Cost – CSBA

Key to Preparing for
Bid Bonds

It has been mentioned a few times in this article, but you will need to be able to qualify for more than just the calculated bid bond amount, since the surety company will base their underwriting on the total amount of your bid. This means, you might need to increase your bonding capacity in order to obtain the bid bond, and the best way to do this is with the help of a surety specialist. We at CSBA have over 225 years of combined experience doing just that. Due to our professional exclusivity with surety bonds, we have formed key relationships with surety companies and construction-oriented CPAs to help our clients have a smooth bonding process and win the bids for the jobs they want.

No matter the bid bond calculation, we at CSBA are able to guide you to meet it.

About The Author

Shaunna Ostrom

Senior Underwriter

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