Construction surety bondsJust about every contracting and service business knows how important surety bonds are to your ongoing solvency and practice. Whether you’re a major contractor or a small startup, having surety bonds enables you to stay competitive, engender trust among your clients and grow your business. Even more, bonding is required by law in order to practice certain kinds of business.

Still, many people have a lot of questions about what exactly surety bonds are, how they work and what kinds of bond you might need for specific jobs. Many of these questions are surprisingly common across the board. Here are a number of the most important questions and answers about construction surety bonds, and where you can find more information to help you get settled.

What Are Construction Surety Bonds?

Construction surety bonds are also called contract bonds. They are agreements between the surety company, the contractor and the customer that ensures the contractor has financial backing to complete a contracted job. If they don’t, the bond will front a line of credit to cover the customer’s losses.

Are These Like Insurance Policies?

No. Insurance policies pay out money to cover a loss. Surety bonds loan money to cover losses due to a business’ inability to meet contractual requirements. With a surety bond, the business is obligated to repay the money fronted in this fashion.

What Jobs Require Construction Bonds?

Contract bonds are required by local, state and federal governments as well as regulatory bodies and general contractors. Under the federal Miller Act, as well as most state regulations, any federal contract worth at least $150,000 requires both performance and payment bonds. Private sector contracts don’t require bonds, but most contractors see their value and use them.

What Kinds of Contract Bonds Are There?

There are many kinds of contract bonds. Some of the most common include the bid bond, for those bidding on projects; the performance bond, for guaranteeing quality work; the payment bond, to guarantee payment of suppliers and subcontractors; and the maintenance bond, to protect against the use of defective materials and faulty performance for a certain period after work is done.

What Are License and Permit Bonds?

License and permit bonds are required by almost every state. They guarantee that the construction contractor agrees to comply with all state, local and federal rules, regulations and laws. It’s important to note that these are different than contract bonds, as they don’t guarantee individual jobs.

What Does a Contract Bond Cost?

The cost of a construction bond will vary based on the size of the contract, usually between 0.5% and 3% of the contract value. The premium for this bond is due as soon as the bond is implemented, though some surety underwriters will permit payment in installations.

Will I Need Collateral?

In general, you don’t need collateral to secure a bond. This could change if the underwriter is uncomfortable with any risk that the bond represents.

How Do I Get a Bond?

If you’d like more information about construction surety bonds, about how you can get a bond, what factors will be considered to qualify you or any other matters, NSSI can help. Check out our FAQ and get in touch today!