A General Guide to Surety Bonds

March 31, 2020

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Sureties are a specialized division within the insurance industry that work with Contractors to underwrite and provide bonds. When working on a construction project, you may be asked to provide a bond. A bond is a three party agreement between the Surety, the project Owner, and the contractor on the project.

There are several different types of bonds, but each is written to guarantee certain contractual obligations and to guarantee the contractor’s duties to the Owner-provided that the Owner fulfills its obligation to the contractor. Below is a list of the most frequent types of bonds:

Bid Bonds

Usually when a Contractor submits a bid to an Owner, they are asked to provide a bid bond at the time of the submission. The bid bond states that the Contractor will enter into a contract when it is offered to them and will provide the bonds that are required.

Bid bonds are generally written with a penalty, which is a percentage of the contract price or bid amount—most commonly 5%, 10%, or 20%. If the contractor is awarded the contract (and there hasn’t been a bid error) and refuses to take the contract, then the Owner may make a claim against the bid bond.

There is generally no cost (premium or fees) associated with the issuance of the bid bond. Requiring a bid bond is generally a good indication that additional bonds will be required at the reward of the contract. Some Owners use this requirement as an additional pre-qualification process, evaluating the underwriting merits of the Contractor and capabilities to complete the contracted work.

Performance Bonds

These bonds guarantee to the Owner that the Contractor will perform its contractual obligations in accordance with the plans and specifications. The forms for these bonds may be provided by the Owner or taken from generally accepted standard forms such as AIA, AGC, or DBI. Whichever form is used, the bonds provide assurance that the Contractor will perform its obligations to the Owner and, likewise, the Owner will perform their obligations to the Contractor. The cost of these bonds ranges widely depending on the credit worthiness of the Contractor. For many Contractors, the cost will be less than 1% but could be as high as 3%+.

Payment Bonds/ Labor and Material Bonds

These bonds are companions to the Performance Bond and in some cases may be requested on a standalone basis. They are provided to assure the Owner that the labor, material, and subcontractors on the job will be paid. These bonds also provide additional protection from liens on the job.

Since these bonds are generally issued in tandem with the Performance Bond, they are included in the premium amount. If the occasion arises that the Owner is requesting a standalone Payment Bond, generally the cost is somewhere near half of the usual bond premium.

Maintenance Bonds

These bonds are used when the Owner wants a warranty period beyond the standard, one year time frame. On a case by case basis, a Surety may consider extending the warranty period for an additional premium charge. In most cases, a Surety will not extend this period beyond 2-3 years unless there are special circumstances. Premiums are calculated based on the total premium multiplied for a factor that is each month beyond the standard one year warranty period. 

No matter what type of construction project you’re working on, typically one of these bonds will fit your needs. If you have additional questions regarding these bonds or additional bonds you may be needing for your specific project, contact us today!

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Topics: Surety Bonding

Written by The TSIB Team

All Authors and TSIB