Contractor bond questions

A performance bond is a three-party guarantee. The surety promises the project owner (the obligee) that the contractor (the principal) will complete the contract according to its terms. If the contractor defaults, the surety may finance completion, hire a replacement contractor, or pay the obligee up to the bond amount, then seek repayment from the contractor and any indemnitors.

No. Insurance transfers risk to the insurer. A surety bond is closer to a credit guarantee: if the surety pays a valid claim, the contractor and indemnitors are expected to reimburse it under the indemnity agreement.

Federal, state, and local public owners require them on most public construction contracts above set dollar thresholds. Many private owners, lenders, and general contractors require them as well, especially on larger projects.

The premium is a percentage of the contract or bond amount, set by the surety based on your credit, financial statements, experience, and the job itself. There is no single published rate, so the only way to know your price is to apply.

Bonding capacity is the size of a single job and the total backlog of bonded work a surety is willing to support for your company. It grows with your working capital, net worth, profitable track record, and banking relationships.

On most public projects, yes. Performance and payment bonds are usually issued together: the performance bond protects the owner, and the payment bond protects subcontractors and suppliers who might otherwise file liens.

A small single bond for an established contractor can move quickly once the application and financials are complete. A first-time account or a large program takes longer because the surety reviews financial statements, work in progress, and references.

No. A quote is not a binder and does not obligate a surety to issue a bond. A bond exists only once the surety executes it.

The obligee notifies the surety and declares default under the contract. The surety investigates and may finance the original contractor, arrange a replacement, take over the work, or pay the obligee up to the penal sum.

Often the penal sum equals 100% of the contract price, but the owner sets the requirement.

Some bond forms include a warranty period; others require a separate maintenance bond.

Generally subcontractors, suppliers, and laborers who furnished work or materials for the project, within limits set by the bond and the governing law.

Yes. Federal and state laws set notice and lawsuit deadlines, and missing them can bar a claim.

Liens usually cannot attach to public property, so the payment bond provides substitute protection.

The obligee sets the bid security amount, often a percentage of the bid. Many sureties issue bid bonds for established accounts without a separate charge, but practices vary.

The owner can claim on the bid bond, typically for the difference between your bid and the next acceptable bid, up to the bond amount.

Usually you need to be underwritten first, because the surety is committing to provide final bonds.

The owner sets the term, commonly one or two years after acceptance, though longer periods occur.

Sometimes. Some performance bonds include warranty obligations; other owners require a separate maintenance bond.

The owner sets it, often a percentage of the contract price.

Suppliers and manufacturers contracting to deliver materials or equipment to public owners or contractors.

Usually not. Installation is a construction obligation covered by a performance bond.

Similar to performance bonds, with emphasis on the supplier's finances and delivery record.

The licensing authority or the city or county issuing the permit.

Often, though smaller license bonds may be issued with limited underwriting.

No. It guarantees compliance with licensing or permit rules, not completion of a specific contract.

Yes, usually starting with smaller bonds and relying on owners' credit and experience.

Not for small bonds. Larger programs commonly require reviewed or audited statements from a CPA.

Owners' personal indemnity aligns their interests with the surety's and provides additional recovery if a loss occurs.

Sureties use working capital and net worth as starting points, but each applies its own judgment to your experience and work type.

Yes. Aggregate capacity covers the uncompleted portion of all bonded work.

Yes, after a loss year, a problem job, or weakened financials.

Sureties price each account individually based on underwriting. A generic rate would not reflect your credit, finances, or the job.

Change orders that increase the contract price usually increase the premium.

Typically the premium is earned once the bond is issued, though terms vary.

A federal law requiring performance and payment bonds on federal construction contracts above a threshold set in the Federal Acquisition Regulation.

A state law requiring bonds on state and local public works, modeled on the federal statute.

Yes, by state and sometimes by type of public entity. Check the statute and the bid documents.

Sureties generally want fiscal year-end statements within months of year-end and interim statements for larger programs.

A work-in-progress schedule listing each open job with contract amount, costs to date, estimated costs to complete, billings, and gross profit.

For larger or growing programs, a short plan explaining your strategy helps.