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Understanding Performance Bond Requirements

Construction Bonds Explained [Infographic]

performance bond requirements

The mayor has signed off on and approved the build of a new public library in the City of Constructionville. An invitation, or request for proposal, is released to the public for contractors to bid on the new library project. The invitation consists of an outline of the work to be performed and the day they will formally meet to review all the contractors’ bids.

The request for proposal means the whole world can apply for this bid. However there’s qualifications to make you applicable

  1. Being a qualified contractor
  2. Qualify for bid bond
  3. The current state of the company, financial health, and previous jobs completed

 

How is the Construction Job Awarded?

The day has arrived to read all the proposals publically. The contractors arrive with their bid packets, insurance requirements, project proposal and a bid bond, typically totaling 5% or 10% of the total proposal price.
It’s common that the contractor with the lowest bid will be awarded the job if the proposal was acceptable; prepared properly by the surety insurance agency and from an acceptable surety market with proper qualifications.

What’s required from the contractors after a successful bid?

Typically the contractor is required respond within 10 days or whatever is required in the Bid Specifications in order to secure the project.

In order to guarantee the contract will be completed as promised, and to protect the taxpayers’ dollars, the City of Constructionville will require the contract to be bonded.

The contractor returns to the surety insurance agency, and upon receipt of Surety’s review and acceptance of all completed paperwork, final contract and bond premiums are processed,The Surety Place will issue the performance and payment bond.

  1. A guarantee to complete the work, or performance bond. The performance bond promises that the contractor will complete the project on time and on budget as promised in his bid. If he fails to do so, the city will be able to recoup any financial losses.
  2. A guarantee to pay, or payment bond. The payment bond promises that the contractor will pay the subcontractors, laborers and material suppliers of the project. If he fails to do so, the city will be protected from having to compensate these workers.

 

How do the contractors get a performance and payment bond?

The contractors go to a surety insurance agency to issue these performance and payment guarantees. The underwriters of the surety insurance agency will consider three things to create the contractor’s bond:

  1. Character. Has the contractor shown good character with previous completed contracts?
  2. Capital. Does the contractor have enough working capital to be approved?
  3. Capacity. Does the contractor have the skills and ability to complete the proposed project?

There are often different programs available for construction bonds- ranging from small programs to larger programs.

Smaller contract, hard to place bonds up to $400,000

Minimal Underwriting

Prime contracts up to $3 MM with an aggregate program totaling $6 MM

Standard Underwriting

Any contracts over $3 + MM with an aggregate program totaling $6+ MM

Full Account Underwriting

Completing the Job and Ending the Bond Contracts

When the job is completed as promised, the performance bond has now been fulfilled. This, in turn ends the performance bond contract.

To end the payment bond, the City of Constructionville requires paperwork that the contractor has paid all the suppliers and subcontractors. Once the paperwork has been signed the City of Constructionville it’s marked as complete which ends the payment bond contract.

Should anything happen to the building once the bond contract has ended, the City of Constructionville typically has one year to contact the contractor for any maintenance related repairs.

 

construction bonds explained [infographic]

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Request Your Construction Bond

If you’re contractor looking for a performance bond, contacting The Surety Place is a fast and smart solution.

While some companies may have trouble placing bonds for contractors with bad credit or previous bankruptcy, the Surety Place prides itself on packaging and approving even the most risky bonds.

Also offering specialty programs for new and emerging contractors.

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Call The Surety Place to start the bond process 866.430.3322 or simply fill the request your bond form below. We will get your bond approved, often within a 24-hour turnaround.

 

April 25th, 2017
SurePlace