The surety world can be confusing for contractors as there are many kinds of bonds you’ll be faced with in order to bid on public construction projects or when required for private ones. It’s easy, especially when newer to bonding, to mistake one kind of bond for another.
As part of CSBA’s commitment to helping California contractors understand more about bonding and surety bonds in general, this article will focus on a common area of confusion:
To begin, we’ll describe what each term means and the process to be issued one before comparing and contrasting them.
What are Surety Bonds?
A surety bond is often an essential part of construction projects funded by tax dollars, but it isn’t unusual for a surety bond to be required for private construction jobs either. Surety bonds are a three-party agreement that legally ties together the principal, an obligee, and a surety company. Each role is often as follows:
Principal: This is an individual or business that has purchased the bond to guarantee the task in question, payment or service, will be finished.
Obligee: This is the entity that requires the bond, such as a government agency or general contractor.
Surety: The company that is backing the bond if the principal fails to fulfill it.
In general, the surety bond guarantees that the principal party will fulfill the obligations of the contract and if they do not, the bond will cover damages and losses. There are several types of bonds, but the three most common ones a contractor will be required to get are:
The process a contractor must go through to be issued any of the surety bonds above are hyper similar but the focus may be more on one factor instead of another, depending on the type of bond you’re seeking. If you click on any of the above types of surety bonds, you’ll see the individual process for each and have access to frequently asked questions contractors tend to have about each surety.
What are Performance Bonds?
A performance bond is a specific type of surety that guarantees to the project owner, or obligee, that the contractor’s work will meet their contractual obligation. In other words, the work will be completed per the terms and conditions of the contract. If a general contractor is requiring a performance bond from a subcontractor, it’s the same principle, but ensuring that the sub-contractor will fulfill their contractual obligations.
Applying for a Performance Bond: As mentioned earlier, any contractor who applies for a surety bond will go through a very similar process, but the focus may be different depending on the bond need. With performance bonds, a surety provider will look at several types of financial records and review the contractor’s business experience.
The specific requirements to be issued a performance bond depends on the size of the bond you need:
- Performance bonds less than $750, 000 can be obtained with a simple 1-2 page application and are more based on the credit of the contractor who owns the construction business and their experience with similarly sized jobs.
- A performance bond that is over $750K and up to $1.5 million requires financial statements from both the contractor’s company and their personal statements as well.
- Performance bonds over $1.5 million often require a CPA with experience in construction accounting and reports that allow the surety provider to track the job performance.
A contractor’s past experience is a big factor when working to obtain a performance bond as the surety provider wants to ensure they can handle the project.
Use this free bond calculator to calculate your total surety bond cost!
Surety Bond and Performance Bond
As you’ve likely gathered, a performance bond is a type of surety bond. Surety bonds are an umbrella term for bonds and include many kinds of bonds contractors may be required to get or require for subcontractors. While there is no difference between a surety bond and a performance bond, there are several between the types of surety bonds a contractor will be required to get. You can read more about those differences in the following articles:
It can be tempting to consider surety bonds as an insurance policy, but that is a common mistake contractors make when looking into bonding. To understand better why, we strongly encourage you to read this:
Bonding a Contractor for Public Construction Projects
The bonding process seems simple enough when summarized, but if the requirements aren’t properly prepared or a contractor hasn’t done the internal work necessary to be bonded for a higher amount, there can be a lot of mishaps that extend the application time. This is one of the reasons it’s important to have an experienced surety specialist at your side, to make sure the process goes smoothly and show you how to increase your bonding capacity.
We at CSBA publish these articles for two reasons: to help California contractors develop their financial literacy and to demonstrate our expertise in surety bonds. For over 35 years, we have partnered with contractors throughout California and of different sizes to identify strategies to win bids, tackle bigger jobs, and grow their business as well as their bonding capacity.
If you’re in need of a surety bond, we encourage you to explore the CSBA difference and align with the experts in contractor bonding.
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