Everything you Wanted to Know About Construction Bonds
An E-Book Written by Thomas M. Hester and Provided by UnitedSuretyBonds.com – Copyright ©2015
Table of Contents
First a little bit about our company. FarmerBrown.com, one of the Internets leading providers of insurance to contractors. After many years of dealing with contractors and listening to their concerns we discovered that there was a great deal of misinformation and misconceptions on how a contractor went about getting bond.
Most of our clients had been dealing with local agents that were not to familiar with contractors insurance and even less familiar with the bonding process.
At Farmerbrown.com you will deal with a professional team that frequently writes bonds. This gives us the knowledge and experience that your local agent may not have. In many cases whether a bond is issued is based on how the application is presented to the bond underwriter.
We have this knowledge and along with our personal relationships we have forged over the years with the underwriters we deal directly with will give you the best chance of having your bond approved. If you are new to the bonding process we will be happy to explain the process fully to you. We know the process can be confusing and time consuming at times.
In most cases if the bond required is under $350,000 all we need is your social security number and signature. At Farmerbrown.com we offer all types of bonds. The three most requested types of bonds are License and permit Bonds, Bid Bonds and Pay and performance bonds.
License and permit bonds are generally required by a City or state when you are getting a permit for a project or you are registering as a contractor. These types of bonds can be issued immediately and usually cost $100. Certain bonds that have a higher penalty amount may cost more.
One other thing that sets us a part from other bonding companies is that we do not charge for bid bonds. If you are the low bidder or a subcontractor many times the terms of the contract will require the contractor to provide a payment and performance bond. These bonds provide a guarantee to the owner that the project will be completed and that all of the suppliers and subcontractors will be paid. If we issue the bid bond there is no further paper work required to obtain the payment and performance bond except for a copy of the contract or the notice of award.
The cost of this bond is 3% or less than the contract price. This cost should always be included in your bid when you are working up your figures. We look forward to working with you.
Bonds and Personal Credit Score
The first thing any underwriter checks when a new application for a bid bond crosses their desk is the credit of the owners and their spouses. If you have poor credit it makes it very difficult to become bonded. As a result of the poor economy during the last few years many smaller contractor’s credit has suffered.
In many instances this was through no fault of the contractor themselves. Prime contractors and developers often time went bankrupt and left small contractors holding the bag. Contractors who were able to hold on during these lean times are usually not in the greatest financial shape.
Now with the improving economy they find themselves in the position to be able to get back on their feet, but only to be knocked back
down again as they are unable to secure bonding because of a low credit score.
· What credit score are they looking for to get a bond?
Generally the minimum credit score is around 700. The so-called “credit score range” for the standard FICO score is 300 to 850. If you do not know your credit score you should obtain a free copy by using sources like CreditKarma.com or similar sites. A quick way to figure out if your credit score is over 700 is if you have unsecured Visa, Mastercard or American Express credit cards. If you have these cards, are current on the payments and do not have any other recently past due bills you typically have a credit score of at least 700.
· What Can I do if my credit score is below 700?
The first thing you must realize is that obtaining Bid Bonds regularly with minimum hassle is the goal you should have to grow your business. At UnitedSuretyBonds.com we want to establish a long term mutually beneficial relationship with your business. This growth may take time and effort.
In situations where the personal credit is not so good a credit report should be obtained. This report should be reviewed carefully for any errors. Errors can be disputed on-line with all the major credit bureaus. Another easy way to raise your credit score is by reducing your credit balances. Be careful not to close any accounts because this actually may have a negative effect on your credit.
· Can I post collateral?
The answer to this question is yes. Surety companies will take collateral in most instances. This option is generally not feasible for most small contractors. The reason for this is that surety companies will require either cash or an irrevocable letter of credit to secure any bonds issued. This amount can vary from 20% to 40% of the contract price. It has been our experience that contractors with low credit scores do not have access to this amount of cash.
· If I have a lot of real estate will the surety company take that as collateral?
The answer to that question is NO. There is a way that you can possibly use the equity you currently have in your real estate to obtain a line of credit from a bank and this in turn can be used to secure the bid bond you need.
When a contractor wants to bid on construction projects that are being advertised by governmental entities that are over $25,000 there is generally a requirement that the contractor along with their bid proposal also submit a bid bond.
The failure to include the bond, if required almost always results in that contractors bid being disqualified as nonconforming/nonresponsive even if they submitted the lowest bid.
Why do Owners Require Bid Bonds?
The bid bond also gives the owner of the project the security that the contractor submitting the bid has been vetted by a third party as to the contractors credit and positive work history. The bid bond also guarantees the owner that the principal will honor its bid. The owner of the project is called the “Obligee” and may sue the contractor the “Principal” and the surety to enforce the bond. If the principal refuses to honor its bid, the principal and surety are liable on the bond for any additional costs the owner incurs in fulfilling the contract.
This usually is the difference in dollar amount between the low bid and the second low bid and if necessary the costs of having the job rebid. The amount of a bid bond is generally five to twenty percent o f the bid amount. This is called the penal sum and is the upper limit on the liability under the bid bond. In certain instances private owners can request bid bond when they solicit work. This is generally not a problem as long as the funds to fund the project can be verified. The major exception to this is the construction or repair of single family homes.
At United Surety Bonds we do not charge contractors to supply Bid Bonds. To qualify for bid bonds for contracts up to $350,000, the owners of the company need to have credits scores above 700 and have been in business for a year. For contracts exceeding $500,000 contractors are required to provide financial statements for the last two years and also a personal financial statements of all the owners.
There are also programs that are available if the contractors credit and financial statements are marginal. These programs generally require collateral of 25% of the contract amount. This collateral needs either to be cash or an irrevocable letter of credit from an acceptable financial institution. They will not accept real estate as collateral. In this type of situation it is best for the Contractor to attempt to secure a line of credit from a bank using the property as collateral.
To ensure the satisfactory completion of a project by a contractor, a Payment and Performance bond is often required by the owner of a project. Payment and Performance bonds are commonly used in the construction industry, mainly for governmental projects.
Payment bonds guarantee that all the subcontractors and suppliers will be paid. Performance bonds guarantee that the bond company will step in and complete the project if the original contractor fails to do so. An example of this would be the insolvency of a contractor.
Another common scenario is that a large contractor may require that their subcontractors provide a Payment and Performance to the Prime contractor. This is done for the same reasons as if the bond was given to the owner, it protects the Prime contractor from any claims from suppliers of subcontractor, along with guarantee that the work will be performed.
A maintenance bond, sometimes called a warranty bond, guarantees the workmanship of a contractor for a given period of time after the project has been completed. Maintenance bonds guarantee against defective workmanship or defective materials.
It is a guarantee to the owner that the contractor will remedy any problems that occur during a specified time period, like design flaws, worker mistakes, and any other issues that may arise.
They generally cost around 1% to 3% of the contract price depending on the length that the bond is required. Some Cities may require maintenance bonds for any Right of Way Work and similar type work.
Bonds are required by certain governmental entities to allow various types of activities to take place in their jurisdictions. These types of bonds are generally required for the following activities, while this is a comprehensive list of various types of miscellaneous or specialty bonds it is no way exhaustive:
These are required in many jurisdictions if you are soliciting business in a municipality or you are selling goods from non permanent location. The requirements for these type of bonds vary from place to place. In order to save time you should request a link to the website that sates the requirements or an email with the forms or requirements.
It is also important to find out if each individual needs a separate bond or they will accept a bond in the name of the company that covers all employees engaged in the regulated activity.
· Itinerant Vendor bond or peddler bond
· Street opening bond or driveway permit
These bonds can be required by the State or a City if you are doing any work on a public way. The most common of these are adding a driveway, connecting to sewers and/or water mains and sidewalk work.
These bonds are very specific. The amount of the bond is usually based upon the size of job and the size of the bond is set by entity requesting the bond. The cost of these is generally 3% of the required bond amount. It can take 1 to 2 business days after a completed application to get these bonds. In most instances these require good credit.
· Developer Bonds
These are required if you are going to doing any type of work that requires building on undeveloped land. These bonds are not the easiest bonds to get as they require the bond company to complete the proposed development if the party obtaining the bond does not complete the work.
The cost of a developer bond is around 3% of the amount the bond that is required. The amount of these bonds are assessed on a case by case basis the entities involved and they determine the amount of the bond. All these types of bonds will require good credit of the party requesting these bonds.
· Alcohol tax bonds or liquor tax bonds
If you are making or selling alcohol you will need a bond. You will be required to get a federal tax bond and in most cases a State alcohol tax bond. The amount of the bond required is determined by the amount and type of alcohol you produce. These bonds are usually a couple of hundred dollars a year.
· Out of State Contractors Bond
This type of bond is required by some States if your business is not based in that State. The out of State Contractor guarantees to the State that company will pay all taxes due to the State from the contractors operation in that State. These taxes are use, sales tax, employment taxes and any income taxes.
These bonds are generally expensive as the possibility of a claim on the bond is higher than in most situations. The cost of these is around 10% of the bond required. These bonds also require good credit.
In most instances, the cost of required bonds varies by the amount of the bond required and the risk that the Surety company has on paying any claims on the bond. The cost of bonds varies from State to State as a result of different State laws. In most cases there is no credit check for miscellaneous bonds, except as outlined above.
If there is a credit check required, the price difference for people with good credit versus those with bad credit is staggering. year. In certain States some companies do not require a credit check to issue these type of bonds, so it is always best to check with the professionals at Farmerbrown.com for a free quote. Good credit as defined by most bonding companies is a credit score above 700, no bankruptcy in last 7 years and no unresolved claims against previously issued bonds.
How long will it take the process to obtain my bond?
Another major concern that contractors have about getting a bond is how will it take to get processed.
In all situations where the contractors credit is “good” as defined above or no credit check is required the bonds can be issued immediately.
These permit bonds are in most cases electronically sealed and can be emailed directly to the contractor for their signature. In some cases an actual signature and seal is required from the Bond company and in that case the bond can be delivered the next day by Fed Ex or regular mail if time allows. We can take a check or credit card over the phone to collect payment for the permit bond.
As a general rule most types of bonds are very easy to get. They are usually not that expensive as well. The stories you may have heard about the “horrors” of attempting to get a bond are mainly a result of contractors who deal with local agents that have no knowledge about bonds.
If your credit is good above 700 and no bankruptcies most bonds up to $500,000 can be issued with a single one page application and just a signature. For other bonds under $25,000 no application may even be necessary, just the name and address of your business, the type of contractor you are registering as and the amount of the bond. That is it!!!
If you are interested in getting payment and Performance bonds and Bid Bonds, you can get prequalified with no effect on your credit (ie a soft hit). So contact us today and we can get the ball rolling.
Here you can find the downloadable version of this ebook.
Single Bonds or Aggregate Programs Application
General Indemnity Agreement
Frequently Asked Questions
· How long will it take to get a license or permit bond?
In most instances within a few hours.
· How will I get the bond?
Most License and permit bonds are electronically sealed and can be emailed directly to you for your signature. If the entity requires a raised seal on the bond it can be sent overnight for an additional $20.00, otherwise regular mail for free.
· How much will the bond cost?
The price depends on the amount of the bond and the entity type requesting it. Most of the bonds will cost around $100.00. State license bonds generally are in the $200 to $300 range depending on State, your credit and type of license you are applying for.
· Are license and permit bonds based on credit?
90% of these bonds do not require a credit check. Most State Contractor license bonds do require you to have a credit score of above 700. If your credit is below that minimum we are still able to get you the bond but they are just more expensive.
· What information do you need?
We just need to know the name of the entity requiring bond(City,Village,Town or State), the amount of the bond, your company name and address and type of contractor you are(Plumbing Contractor, Roofing Contractor, General Contractor, etc.). If the type of bond requires a credit check we will need the Social Security Number of at least one of the owners.