KGE Real Estate

A while back, I wrote a post about surety bonds and how I needed one to complete a specific mobile home deal. My research led me to the fact that this type of bond no longer exist, if in fact they ever did. However, it is always good to know more about bonds with respect to real estate. So, one of my readers graciously agreed to write a 3-part series on Contract Bonds, which are a type of surety bond used in the real estate universe.

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Contract Bonds are an integral part of any construction project. In fact, they are often mandatory requirements that municipalities and private developers rely on for security and financial protection in the face of default, foreclosure or some other unforeseen event.

Contract Bonds are often called Construction Bonds. The latter is a catch-all term that covers a host of different types of bonds that are associated with a construction project from start to finish. Essentially, Contract Bonds ensure that project owners are protected in the event that a contractor does not fulfill his or her duties as specified in a contract.
There are seven major types of Contract Bonds: Bid Bonds, Maintenance Bonds, Payment Bonds, Performance Bonds, Site Improvement Bonds, Subdivision Bonds and Supply Bonds.

Over the course of the next few days, we’ll take a more detailed look at each of these, starting with Bid Bonds.

Bid Bonds

Bid Bonds provide financial assurances that a contractor can accept a project for the specified price as the lowest acceptable bidder. Most municipalities and private developers require Bid Bonds for all projects. Those project owners can recover the difference between the two lowest bids if a contractor refuses to start work after receiving a contract.

In general, contractors can rescind their bid before all bids are opened. But once a contract is awarded, contractors cannot withdraw a bid without losing bid security.

Bid Bonds are often issued by insurance company agents rather than through direct sales. The market for writing Bid Bonds has tightened recently after a period of somewhat lax underwriting standards. But contractors who qualify can still obtain solid rates. Those with credit problems or troubled finances should expect to encounter higher premiums.

Since the insurance company who issues a bid bond also promises to issue a performance bond on the contract, the processing and underwriting of the bid bond is just as strict as the performance bond. Contracting companies usually must submit the following information:

• Application
• Owner’s Resume
• Business Financial Statements
• Owner’s Personal Financial Statements

Sureties often require a financial indemnity from the construction company in the event that it fails to fulfill the contract or runs into financial problems during the course of the project.

The U.S. Small Business Administration operates a surety bonding program for small businesses. Entrepreneurs  and small business owners should contact their local SBA office to learn more.

To learn more about Contract Bonds and other types of surety bond, visit www.suretybonds.com.

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Josh Kayser is a principal with Surety Bonds.com, a nationwide surety bond agency focused on consumer education and surety bond news updates.