Performance Bonds – 5 Tips on “How To Get Approved” and Performance Bond Advantages and Basics

Contractors are required to be approved for a surety bond facility in order to bid on and to complete most public or government jobs.

Types of Contract Bonds:

1) Construction Bonds guarantee that a construction company will complete a project as promised.

2) Bid Bonds guarantee that the contractor will agree to complete the project at the bid price and are able to meet other bonding required, if the bid is accepted.

3) Performance Bonds guarantee that the contractor will perform the contract as agreed.

4) Payment Bonds guarantee that the subcontractors, labourers and suppliers, will be paid, as agreed.

Other:

Maintenance Bonds, which guarantee against defects in materials or workmanship

License or Permit Bonds, which are required to get a license or permit under state/province or local law.

Labour and Material Bonds, which guarantee payment of labour and to material suppliers.

Advantages of Bonding for Contractors

Performance Bonds allow contractors to conform to biding requirements on government and private projects. Surety is NOT insurance – it is a financial guarantee. Being bonded increases the number and size of jobs that a contractor will have the opportunity to bid on. Providing surety bonds, in place of other forms of security (letters of credit) also allow contractors to retain their working capital.

How to get started

STEP 1: Find out what surety bonds are required for the project you are bidding on by looking in the tender documents. Some jobs require a 100% guarantee, for example, while other jobs require only 50%, for example.

STEP 2: Contact a specialty surety bond broker or agent. Your current insurance broker may have surety bond capabilities, however a specialist is highly recommended. Make sure whatever brokerage or agency you deal with is licensed in your state or province. It’s also best if they’re familiar with your specific type of industry. You’ll also want to be certain that the Surety Company that your broker or agent is recommending is federally approved. For a list of accepted companies, see USA: http://www.fms.treas.gov/c570/c570_a-z.html and Canada: http://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=14494&section=text#appL

STEP 3: Gather the information requested by the surety bond broker or agent, who will then present it to one or more surety company underwriters for approval. Your broker or agent may have individual requirements, but it should include: financial statements prepared by an accountant / CPA, resumes of key employees, a business plan, evidence of a bank line of credit and sufficient cash flow, recommendations from completed projects, and other information relevant to your industry.

The goal is to impress upon to the Surety Company that you have the Capital, Capacity and Character, to complete jobs as contracted to do so. In other words, you keep your promises, meet your deadlines, have done or are doing similar work and have or have access to the necessary equipment and cash to complete future contracts.

STEP 4: Work with your surety broker or agent to supply additional information as requested by the surety company underwriter. Personal indemnity or guarantees, including personal net worth statements are often requested and required.

STEP 5: Once you receive your first surety bond, keep your broker or agent apprised of the progress of the job. Having a strong relationship with the broker/agent and the underwriter will make future bonds easier to obtain.

Bonus Step: Be sure we speak to your surety broker or agent about other alternatives to traditional performance bonding facilities if you do not qualify or if your surety bond limits requirements are minimal.

Conclusion

Congratulations! You’re on your way to getting approved for a construction bond facility.

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