As a contractor, when you want to bid on a tax-funded construction job, you’ll likely be required to apply for and obtain several kinds of bonds. The different types of bonds can get somewhat confusing or the bonding process difficult to navigate.
We at CSBA work to educate California contractors on the types of bonds they’ll be required to get and make sure they’re prepared for each step of the underwriting process. In this article, we’ll focus on what a contract bond is and answer questions a contractor often has around contract bonding.
Contract Bonds Defined
Contract bonds are a type of surety bond that is filed with the owner of a project, referred to as the Obligee, in order to bid on a construction project or enter into a contract to build the project. To put it simply, and in broad terms, it guarantees that contracts will be fulfilled and the term is often interchangeable with “construction bond.” By requiring the bond, it means that if a contractor fails to fulfill the terms of the contract, the owner can make a claim on the bond to recover any financial losses and ensure the contract obligation is fulfilled.
A contract bond isn’t a specific surety bond, which can confuse some contractors when required to get it. Contract bonds are a broad categorization of surety bonds. The most common surety bonds under the contract bond category when bidding on a construction job include:
The most common surety bonds under the contract bond category when bidding on a construction job include:
There are several other types of contractor bonds that are more uncommon, such as:
- The Maintenance Bond
- Site Improvement Bond
- Supply Bond
Each of these surety bonds falls under the contract bond category, so when a project owner requires one, it’s important to understand which one they are referring to. The type of contract bond should be outlined in the bid requirements before a contractor submits a construction bid and wins the job.
Is a Contract Bond Required?
Whether a contract bond is required for a contractor primarily depends on the kind of construction job they’re bidding on. By law, any construction project that uses tax dollars must require several types of contract surety bonds:
This isn’t to say a surety bond won’t be required by privately-held construction jobs either. It’s better to approach bonding as thinking of it as a general requirement, specifically the three listed above. This way you’re prepared to get a contract bond no matter when it’s required.
What is the Average Contract Surety Bond Cost?
The second question a contractor usually asks themself after hearing a contract bond is required is, “what’s it going to cost me?” All surety bonds have a premium a contractor pays to get bonded, but the amount can range between 1-3% of the contract amount. The premium rate depends on several factors, including:
- The contractor‘s credit score
- The financial statements provided
- If financial statements have been prepared by a CPA
- The size of the contract bond needed
- The strength of a contractor‘s internal financials
- Scope of work
It’s important to note that you have some control over the cost of a bond, which you can read more in-depth about here: (how to know if you’re paying too much for a surety bond article)
Use this free bond calculator to calculate your total surety bond cost!
What are the Requirements for a Contract Bond?
As you know now, contract bonds are a type of surety bond, and the requirements to apply for one can differ from bond type to bond type. Taking it even one step further, it can depend on the bond amount a contractor needs. However, the good news is that the process for prequalifying for bid bonds, payment bonds and performance is the same. When a contractor qualifies for one, the surety is typically qualifying them for all three. Here are the basic requirements:
The Bid Bond, Payment Bond and Performance Bond
- The contractor’s personal credit score
- The length of time the contractor has been in business
- The contractor’s track record of profitable projects finished
- 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 bond over $750K and up to $1.5 million requires financial statements from both the contractor’s company and their personal statements as well.
- 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. Why construction accounting experience is important in a CPA is fully explored in this article, we strongly encourage you to read it: (are financial statements from a CPA always required for bonding article)
- Do you have the internal controls to account for and manage the job?
Contract Bonding with Surety Experts
The best way to navigate and successfully gain any contract bond is by working with a surety expert. We at CSBA are committed to improving the surety literacy of California contracts and that’s why we write these articles. Understanding surety bonds is integral to working in construction and while the financial end of bonding may be dull and confusing, the basics are important to know.
Working with CSBA can help remove the burden of applying for surety bonds altogether. We help prepare you for the underwriting process and show you how to increase your bonding capacity to successfully bid on larger jobs. We not only help contractors get bonded but give you the tools to structure your business to make it more attractive to surety providers.
Worry about building California, we’ll take care of the surety bonds you need.
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