Contractors are frequently required to obtain surety bonding before they can be eligible to participate in a project. This requirement stems from the U.S. Miller Act, which set a precedent that publicly funded projects valued at $100,000 or more must be secured by performance and payment bonds. These contractor surety bonds can prevent liability and legal issues from hamstringing a project’s ability to move forward. For instance, if a contractor fails to pay one of his subcontractors, the complaint moves to a bond action claim rather than a builder lien on a publicly-owned structure.
Since the U.S. Miller Act passed, states have followed suit with their own version of Little Miller Acts, and many non-publicly funded projects have gone on to adopt Miller Act-like requirements for all contractors to be bonded.
Common contractor surety bond products that are required include performance bonds, payment bonds, and bid bonds. Other products may involve supply bonds, subdivision bonds, and site improvement bonds. Learn more about what these products offer and how they relate to mandatory requirements for contractors by reading on.
How Surety Bonding Works
Basically, a surety bond is a product a contractor (principal) can obtain that guarantees payment from the surety in the event a condition is not met. Those affected by the failure to meet a certain project condition, like timely completion or payment of all subcontractors, can take action on the bond in order to request reimbursement for their costs incurred by failure. If the claim is valid, the surety will pay out the full amount of the bond — or the full amount of damages in question — and then the surety will take action to recover their losses from the principle.
So, unlike insurance, principals must still pay for claims on their secured surety bonds, but the products offer peace of mind to those involved on a project and help provide a clear path to recourse for those affected by a failure to meet promised standards or contract terms.
What Is a Performance Bond?
Performance bonds guarantee the performance of an awarded contract, including projected completion dates, design details, standards of quality and more. A contractor who goes bankrupt in the middle of a project, for instance, can lead to a performance bond claim. Serious flaws discovered in a project contrary to the project requirements can also lead to a bond claim, as can severe project timeline overruns.
For bond-required contracts, the main contractor will have to secure a performance bond and will typically assume liability for all subcontractors working below them. To protect themselves, top-level contractors may require subcontractors to obtain their own performance bond, typically equivalent to their contribution to the project value.
What Is a Payment Bond?
A payment bond guarantees payment for all suppliers of labor and materials to a project. The aim of the bond is to ensure that the contract recipient pays everyone whose services they utilize in full and on time.
What Is a Bid Bond?
Bid bonds are quite similar to performance bonds, but they assure that a contractor placing a bid will follow through with the stated bid proposal to completion or that they will follow through with an agreed-upon alternative for design-build bids. These bonds protect project owners from frivolous bids and reduce the risk of having to restart the bid process.
What Are Subdivision Bonds or Site Improvement Bonds?
Some contracts need additional conditions to be met outside the scope of the project itself. Since these conditions may not be covered under the terms of a performance bond, a secondary bond may sometimes be secured to ensure they are met.
Subdivision bonds involve mandatory improvements to public right-of-way infrastructure in subdivision areas, such as the installation of code-compliant sidewalks, sewers, gutters, curbs, roadways, signage, and more.
Site improvement bonds are similar to subdivision bonds but limited to buildings and their immediate public property surroundings, such as adding green spaces or proper drainage fixtures.