AMERICA'S LEADING PROVIDER FOR SURETY BONDS
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Contract Bonds
Required by government or private entities for project-based work. Contract bonds include bid/proposal, performance and payment, and supply bonds.
Whether you’re a recently licensed insurance agent or a seasoned veteran of the industry, contract bonds can be confusing at times. Between the legalese of the contract language and the internal jargon of the Surety Company, insurance agents tend to get stuck in the middle asking “Can we please just get this bond issued?!” Fortunately, the basics can be broken down into a few key definitions and explanations so agents can lean on surety experts like BondExchange to secure these important products for your contractor customers.
To start, we need to explain the definition of a contract bond. Contract bonds are a type of surety bond that contractors purchase when bidding on or entering into a contract to perform work for a project owner. The most common types of contract bonds are Bid Bonds and Performance and Payment bonds.
To start, we need to explain the definition of a contract bond. Contract bonds are a type of surety bond that contractors purchase when bidding on or entering into a contract to perform work for a project owner. The most common types of contract bonds are Bid Bonds and Performance and Payment bonds.
Most construction projects start with a bidding process, where eligible contractors submit their cost estimates (bids) to the project owner. The contractor with the lowest bid is generally awarded the project. But how can the project owner be confident that the bidders are qualified to complete the project?
Enter bid bonds. Bid bonds provide financial compensation to project owners that contractors bidding on a project will sign the contract and meet all requirements of the bid specifications, including the ability to provide a performance and/or payment bond, if the contractor is the winning bidder.
In the event the contractor does not meet these requirements or fails to sign the contract, the surety bond company must pay the project owner the difference between the winning contractor’s bid and the next lowest bidder, but not more than the bond amount. The amount of the bid bond is usually calculated as a percentage of the contractor’s bid amount, generally 5%, 10% or 20%.
Enter bid bonds. Bid bonds provide financial compensation to project owners that contractors bidding on a project will sign the contract and meet all requirements of the bid specifications, including the ability to provide a performance and/or payment bond, if the contractor is the winning bidder.
In the event the contractor does not meet these requirements or fails to sign the contract, the surety bond company must pay the project owner the difference between the winning contractor’s bid and the next lowest bidder, but not more than the bond amount. The amount of the bid bond is usually calculated as a percentage of the contractor’s bid amount, generally 5%, 10% or 20%.
We learned that project owners can ensure they pick qualified bidders by requiring a bid bond. However, the bid bond does not protect the project owner beyond the bidding process. To provide a guarantee that the project will be completed, owners can require a performance and payment bond. Performance Bonds provide assurance to the project owner if a contractor fails to complete the work specified in the contract and within the allotted time frame.
Payment Bonds work in conjunction with performance bonds and ensure that laborers, suppliers and vendors will be paid by the contractor, preventing liens on the project that can affect the project owner and the success of the project.
Performance and payment bonds can be requested by any project owner, but most often these bonds are required for government owners (i.e. federal, state, and local government agencies). On all federally funded projects of $100,000 or more, performance and payment bonds are required by legislation known as The Miller Act passed in 1935. Many states and municipalities have adopted so-called “little Miller Acts” that extend similar surety bond requirements to state and local government projects.
Payment Bonds work in conjunction with performance bonds and ensure that laborers, suppliers and vendors will be paid by the contractor, preventing liens on the project that can affect the project owner and the success of the project.
Performance and payment bonds can be requested by any project owner, but most often these bonds are required for government owners (i.e. federal, state, and local government agencies). On all federally funded projects of $100,000 or more, performance and payment bonds are required by legislation known as The Miller Act passed in 1935. Many states and municipalities have adopted so-called “little Miller Acts” that extend similar surety bond requirements to state and local government projects.