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.

Limiting Exposure to Liquidated Damages

California tends to have a lot of very large projects, and with very large projects often comes significant liquidated damages. Surety companies generally consider liquidated damages greater than $5,000 per day to be fairly significant, but we see many large projects that have LD’s of $10,000 to $30,000 per day, which creates significantly more exposure for contractors in the event the project goes sideways and can’t be completed on schedule.

There are some simple and important ways contractors can mitigate their exposure to LD’s, but before I discuss those, let me address a common misconception about LD’s. I have heard comments from contractors like the GC won’t charge that entire amount to me, it will be allocated proportionate to the subs based on level of responsibility. Or the owner of the project will have to add time to the contract if the equipment/material can’t be delivered in time. Practically speaking these things may be true, but in the event of a dispute, it gives a substantial amount of leverage to the GC or project owner, because while a disagreement is worked out, they will typically deduct those LD’s from progress payments and retention, which can put significant pressure on you as the contractor by squeezing your cash flow. Avoiding this disadvantaged position from the get-go when possible is always better than leaving it to chance.

Limiting LD’s in Your Contract

I know some of you reading the heading of this paragraph are already thinking, “I can’t limit the LD’s in your contract.” On prime public works contracts this is certainly true. However, on subcontracts with GC’s or on private jobs, I see it done all the time.

One approach is to request the LD’s to be reduced to a dollar amount more in line with the size of your contract. For example, if you are working as a sub on a $500 million project with $50,000 per day liquidated damages, and your scope is only $5 million, you can request your LD’s to $5,000 per day.

When you think about the LD’s cited in the example above, it would only take getting behind 100 days on a project at $50,000 per day to equal your entire $5 million contract amount. A very common and effective way to deal with situations like this is to put a cap on the amount of LD’s that you can be assessed. For example, you could request to limit the LD’s to 10% of your contract amount or $500,000 in this case. Many GC’s negotiate similar clauses in their prime contracts with owners, but they aren’t passed along to subs automatically.

Bonding Subcontractors

If your scope is on the critical path and you have subcontractors, it can make sense to require performance and payment bonds from the subs. The bonds give the subcontractor a high level of accountability, and in a worst-case scenario, it provides you an avenue to recoup delay costs or LD’s caused by the subcontractor’s lack of performance.

Conclusion

Construction is an inherently risky business, and there’s no reason to accept more risk than necessary in those areas where it can be mitigated.

About The Author

Dan Huckabay

President

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