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.

Construction Bonding Capacity Explained

Bonding capacity is an important area of surety bonds to understand as a contractor. Knowing how your capacity is calculated, what factors are used to determine it, and what steps you can take to grow your bondability can help you build your business.

As part of CSBA’s effort to educate California contractors on surety bonds and all the areas essential to securing them, we’ve put together a guide to help you understand what bonding capacity is and how to improve it.

What is Bonding Capacity?

Bonding capacity is the limits of surety bonds that a surety company will provide to a contractor. There are two types of bonding capacity that surety companies set. The first is the largest single project the surety will bond. The second form of bonding capacity that surety companies set is the total backlog of bonded and unbonded projects the surety will support the contractor having.

The reason surety companies set a single job limit that they will bond is because it has been shown in the construction industry that taking on too large of a project increases the risk and chance of failure. The same is true for contractors that grow their backlog too quickly, which is why surety companies set a total bonding capacity.

The Guide to Increase Your Surety Bond Capacity

To help California contractors understand bonding capacity and how to increase it, we’ve assembled this handy guide below to help you navigate the processes along with tips for increased capacity.

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How is Capacity Calculated?

As discussed previously, there are two types of bonding capacity that can be calculated:

Capacity per project: the size of bond a surety is willing to issue to a contractor for a particular project
Aggregate bonding capacity/total capacity: the total amount of bonds a surety will provide to a contractor for all the work in their backlog

While both kinds of bonding capacity are based on similar information and factors, they are calculated a little differently. For example, your bonding capacity per project is calculated by the surety examining the largest project you’ve profitably completed and the average size of projects you’ve completed.

Generally, a surety will approve a bonding capacity per project that is twice the size of your largest project if the other factors are satisfied, but there are some important exceptions to the guideline, as outlined below, where a surety will consider bonding even larger jobs:

The larger project is for a previous client the contractor has worked with
The larger project is similar to projects the contractor has completed before
The timeline for completing the larger project won’t strain the operational resources of the contractor
The larger project won’t have a cash flow demand more excessive than previously completed projects
A significant portion of the job is material or subcontracted out

Helpful Articles from CSBA

To learn more about how sureties consider raising the bonding capacity for contractors on a single project, we strongly encourage you to read here:

Aggregate or total bonding capacity, as mentioned earlier, is the total amount of bonding a surety will extend to a contractor at any one time. To learn more about aggregate bonding capacity, we strongly recommend reading here:

In establishing an aggregate limit, sureties are trying to ensure the contractor has the financial resources to cash flow the work. To do so, the surety will review the contractor’s financial information both on a company and personal level as well as look at access to capital through bank lines of credit. To gain an understanding of the financial ratios sureties look for, read our article:

Tips to Increase Capacity for Larger Construction Bonds

As mentioned, the best way to prepare for larger projects coming up and to take advantage of greater opportunities is to invest in and take steps to increase your bonding capacity. We at CSBA are committed to educating California contractors on the financial end of our industry and helping them to achieve their business goals using our extensive expertise with surety bonds. As part of that effort, we strongly recommend you read our 7 Tips to Increase Bonding Capacity and begin building up your aggregate and per-project capacity to secure the projects you want:

Using Higher Bonding Capacity as a Marketing Tool

A higher bonding capacity is usually discussed in terms of being able to qualify for larger surety bonds, but that doesn’t address the many other advantages that come with a larger capacity. Oftentimes, public agencies and general contractors will require the contractors that want to work for them to prequalify and submit a letter from your surety stating your bonding capacity. The brand name and reputation of the surety company along with having higher bonding limits says a lot about the contractor and their ability to perform, which can give you a leg up on being selected.