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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, Performance Bonds, Payment Bonds, Supply Bonds, Site Improvement Bonds and Subdivision Bonds.

Today, we’ll look at Supply Bonds, Site Improvement Bonds and Subdivision Bonds.

Supply Bonds

Supply Bonds are a standard element of a construction project and required for public works projects. These bonds ensure that materials suppliers provide the requisite supplies for a project as specified by the contract. Supply Bonds also provide a degree of financial protection for the purchaser in the unlikely event that a supplier defaults.

All public projects with a value of $100,000 and above must include Supply Bonds, as per federal law. But most states have similar mandates that require Supply Bonds for projects that require the expenditure of public tax dollars. These bonds are also common to private projects.

Supply Bonds are often garnered during the beginning phases of a construction project, long before shovels hit the ground. They are typically cheaper than other types of Contract Bonds.

Like the others, rates will vary depending on the market, the size of the job, the contractor’s unique financial history and a few other factors. Surety companies try to ascertain whether a contractor can pay for the value of the bond in the event of a claim.

Site Improvement Bonds

Site Improvement Bonds are specific to existing structures. These bonds guarantee that contractors make improvements to existing structures as per current and applicable building codes and governmental regulations.

These bonds guarantee the completion of improvement such as curbs and gutters, sidewalks, utilities, grading, storm drains and streets. Site Improvement Bonds typically delineate the estimated cost and anticipated time until completion.

Site Improvement Bonds can prove crucial for contractors, who often must obtain these bonds before acquiring construction permits. These bonds can come in several forms, including:

• Certificates of deposit (CDs)
• Cash, certified cashier’s check or money order
• Irrevocable letter of credit issued by a bank, credit union, etc.
• Corporate surety bonds

Surety bonds are the most common avenue, as the others have the potential for unique problems and issues. Banks can seize property immediately if they choose not to renew a letter of credit. CDs and cash can tie up capital.

Subdivision Bonds

Subdivision Bonds are specific to new structures. They do not work with existing buildings.

These bonds are required by municipalities or states in which a subdivision is to be constructed. They basically guarantee that the contract will be followed and cover multiple areas of a construction project, from streets and houses to drainage areas. Subdivision Bonds are often required before plats can be filed with a city or county.

Like Site Improvement Bonds, Subdivision Bonds can take several forms, including surety bonds, letters of credit and cash. Bond amounts typically vary by geographic location and depend on the size of a project. A contractor’s unique financial status will likely dictate in part rates and terms.

The market for Site Improvement Bonds has improved in recent years.

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.

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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.

Today, we’ll look at Maintenance Bonds, Payment Bonds and Performance Bonds.

Maintenance Bonds

Maintenance Bonds ensure that a contractor’s work on a specific project is without defects for a specified amount of time after completion. These bonds are typically mandatory upon completion of a construction project.

These bonds guarantee work and craftsmanship, protecting against a host of potential problems and errors, including design defects, workmanship faults and other issues. Contractors are responsible for buying Maintenance Bonds, which can be obtained through a surety company or even sometimes an insurance company.  But it is important to remember that surety bonds are not the same thing as insurance policies.

If a problem or defect arises, a project owner can file a claim against the Maintenance Bond. At that point, the bond issuer will work to ensure that the problem is corrected by the contractor or another qualified agent. If that is not feasible, then the bond issuer will determine what financial compensation is appropriate.

Maintenance Bonds only cover a limited duration. Once they expire, the project is no longer under any workmanship guarantee. They provide security and protection for the term of a given bond, but they are not a viable substitute for insurance or another maintenance plan.

For contractors, the price of maintenance bonds will depend on their credit and financial history. Contractors with low or poor credit should expect to pay higher rates and may have to find a surety company that specializes in bonding at-risk companies.

Performance and Payment Bonds

Performance and Payment Bonds provide a layer of financial protections for project owners against contractors who default or somehow fail to perform work as specified by a contract.

Performance Bonds and Payment Bonds are typically issued together upon the awarding of a contract. Generally, the two are issued as a single “Performance and Payment Bond” for a project. Paired together, they help guarantee that work is performed and that the contractor pays all subcontractors, laborers, suppliers and others.

For many public works projects, these bonds are required by law to help safeguard public investment. Mechanics liens can’t be held against public property, meaning that Payment Bonds represent the sole form of financial protection when subcontractors and others have not received payment on a given project. All public projects that exceed $100,000 are required by federal law to have surety bonds.

Subcontractors or other aggrieved parties can file a claim on a Performance and Payment Bond if they fail to receive payment. Bond issuers then ensure that compensation is received. The current market for these bonds is relatively stable given the current state of the economy. Contractors should expect traditional, stringent underwriting guidelines to be employed.

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.

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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.