ALL ABOUT CONTRACT BONDS
Here’s what you need to know about the different types of Bonds for your Construction Company as well as some key concepts regarding contract bonds:
PERFORMANCE BOND: A bond issued by a Surety guaranteeing to the Owner (Obligee) that the Contractor (Principal) will complete the work in accordance with the contract. Performance Bonds are typically issued for an amount equal to the contract amount. The contract is referenced in the performance bond and the performance bond guarantees every line and every word of the contract.
PAYMENT BOND: A bond, issued by a Surety (Bonding Company) guaranteeing that the Contractor (Principal) will pay everyone who supplies labor and materials to the job (i.e. the suppliers and subcontractors). On a Payment Bond, the Obligee is the Owner since the Owner wants a guarantee that subs and suppliers are paid but the guarantee also extends to subcontractors and suppliers who can file claims against the bond. Payment Bonds are always issued along with a Performance Bond and almost always issued for the amount of the contract.
BID BOND: A bond given by a contractor at the time of the bid, to prequalify their bid. The bid bond guarantees that if the contractor is awarded a job, they will sign a contract and post a performance and payment bond to guarantee their work. A bid bond legally validates a contractors bid. A bid bond is issued for a specific amount, often for 10% or 20%
MAINTENANCE / WARRENTY BONDS: Often required after a bonded contract is completed to guarantee maintenance agreements and / or warranties.
CONTRACT BOND DURATION: Contract bonds become effective at the time of issuance, which corresponds with the date of the underlying contract. They remain open until the contract is complete and the work is accepted by the owner. Premium is a “one time” charge, contract bonds usually do not renew.
RATES CHARGED FOR CONTRACT BONDS: Rates charged for contract bonds are often expressed as “dollars per thousand” of contract value. A common, standard rate, on a $5.0 Million contract, for instance is:
$25.00 per thousand for the first $100,000 of contract value,
$15.00 per thousand for the next $400,000 of contract value,
$10.00 per thousand for the next $2,000,000 of contract value
$7.50 per thousand for the next $2,500,000 of contract value
Rates can also be expressed as percentages. The equivalent percentage of the above rates are 2.5%, 1.5%, 1.0%, etc. Bond rates are also quoted as “straight rates” such as 2.0% straight, 2.5% straight or 1.8% straight, meaning the rate is applied to the entire contract amount.
ADDITIONAL PREMIUM FOR CHANGE ORDERS: Many times the final contract price will increase due to change orders. In that case, expect a bill for the additional premium, based on the above rates.
With this information in mind, if you would like to apply for a contract bond or learn more about our requirements click here and fill out our Quick Response Form!