Top Five Reasons Why You Might Need a Contract Bond

in Contract Surety

Contract bonds help provide assurances that a project will get done. But there is more to them than that.

Contract bonds not only offer specific protections to the parties to a construction contract; they also offer potential benefits for a contractor’s business.
Read on for five reasons why you might need a contract bond.
As a contractor, you have no doubt heard about bonds. Perhaps you have even been approached by a broker seeking to secure bonds on your behalf. You almost certainly posted a license bond when you applied for your contractor’s license.

But why might you need or desire a contract bond? Different construction projects (and different stages in your contracting career) can present challenges that may best be addressed with contract bonds. Bonds may also might help you promote business growth and security.

Here are our top five reasons why you might need a contract bond:

  1. You want to win new business. Your professional reputation as a contractor matters, especially when you are bidding on a new project. You want to demonstrate, without any doubt, that you intend to satisfactorily complete the project. Presenting a bid bond helps demonstrate that you are financially committed to performing the contract on which you are bidding.

    Bid Bonds:
    When you post a bid bond, you send the message that you are serious about successfully undertaking the project. Bid bonds, subject to their terms and conditions, provide financial protections for the owner and also provide the owner with some assurance of your company’s financial stability and reliability.

  2. You take financial responsibility seriously. No one undertakes contracting work expecting a worst-case scenario. However, should you encounter financial difficulties, a payment bond, subject to its terms and conditions, may ensure that the subcontractors and suppliers, from whom you received valuable services, receive payment.

    Payment Bonds:
    Payment bonds potentially provide an avenue for debts to subcontractors and suppliers to be paid if the bonded contractor cannot make those payments. Having a payment

    bond in place can also provide some assurance to subcontractors and suppliers, and to the owner or developer, that those providing services or supplies will receive payment.

  3. You want to take on public works projects. If you are ready to throw your hat in the ring as a public works contractor – great! To do so, you will have to secure bonds. In fact, you will likely be required to provide both performance and payment bonds.

    Performance Bonds:
    You may be familiar with the Federal Miller Act, but if not, here is the condensed version: Any contractor taking on a federal project worth $100,000 or more must be bonded. Most states have specific statutes (similar to the Federal Miller Act) that apply to public works projects in those states.

    A performance bond, subject to its terms and conditions, offers an assurance that a project will be completed according to the terms of your bonded contract. Posting a performance bond tells the project owner that you are serious about completing the bonded project, and if you cannot fulfill your contractual obligations, the surety can potentially get the work done.

  4. You need a steady flow of supplies. Sometimes problems arise that are completely outside of your control. For instance, a supplier does not deliver as promised. Not only can a situation like this disrupt work on your project, but you will still need to buy the necessary goods. Look to supply bonds to help.

    Supply Bonds:
    Supply bonds spell out expectations for suppliers. These bonds, subject to their terms and conditions, require that suppliers provide the supplies, materials, and equipment that they have agreed to provide in a timely manner and as set forth in applicable purchase orders. If the supplies do not arrive as agreed, supply bonds may protect against loss through reimbursement to the purchaser.

  5. You are a problem-solver. Sometimes mistakes happen. If you complete a project and it is later found to have defective materials or workmanship, you could be responsible for repairs. Maintenance bonds, subject to their terms and conditions, help assure the owner that repair and warranty obligations will be fulfilled. Maintenance bonds can often be an effective tool to leverage in close-out negotiations and dispute resolution, even when they are not contractually required.

    Maintenance Bonds:
    If bid bonds provide assurances at the outset of a project, maintenance bonds provide assurances at the end of the project. Maintenance bonds, subject to their terms and conditions, may protect the owner from losses related to defective materials and workmanship after a project has been completed.

Want to know more about contract bonds or surety in general? For more information on our offerings, including customized construction consultation services, contact your agent or a Liberty Mutual Surety Underwriter.

Your bond program: planning for growth

in Contract Surety

Looking to expand your bonding program?

At Liberty Mutual Surety, we have a team of underwriters that specializes in serving smaller-sized contractors. One of the most common questions we receive from our agents and their contractors is, “How can I grow into an expanded bonding program?”

While each contractor has different goals and challenges, our underwriters shared the following considerations they may factor into their underwriting — particularly when accounts are planning to grow. 1

Project experience

  • Establish a successful track record, which demonstrates your company is prepared to take on more complex
    projects, both in size and scope.
  • Share your track record and consider providing references, which can speak to your experience and success
    on previous projects.
  • Develop a business plan that outlines plans for growth. These plans should include steps to ensure you have the necessary resources, including an experienced team and the skilled labor to support the growth.

Financial capacity

  • Of course, financial stability is important. Securing the services of outside professionals, such as bankers and Certified Professional Accountants — with experience with the construction industry — can help you develop optimal bookkeeping and cost control strategies.
  • Limiting debt and demonstrating consistent, profitable growth year after year also inspires confidence your business can weather the cyclical nature of the industry.
  • While not always necessary, providing an upgraded financial statement can be an important step, particularly for accounts looking to grow into a larger program.

Enthusiasm and preparation

Graduating into an expanded bonding program takes commitment, but we are pleased to work with our agents and their contractors to learn about their goals. Contact us about your plans for growth — we succeed when you do!

1. These general insights are provided from the surety’s perspective and are not intended to be an exhaustive list of underwriting criteria. Additionally, risk-management, legal, and other financial/business decisions must ultimately be made by the contractor.

Small Business Administration Surety Bond Guarantee Program: Viable Options for Small, Emerging or Challenged Contractors

Liberty Surety in Contract Surety, Nonstandard business

The Small Business Administration (SBA) Surety Bond Guarantee Program began in 1971. It’s designed to increase small businesses’ access to federal, state, and local government contracting, as well as to private-sector contracting, by guaranteeing bid, performance, payment, and specified ancillary bonds. The program primarily serves contractors that cannot obtain bonding through traditional commercial channels, such as small and emerging contractors and those new in business.

Subdivision bonds – not your typical contract bond

Liberty Surety in Contract Surety, Subdivision

Subdivision bonds operate differently than traditional contract performance and payment bonds, and these differences impact the approach in which subdivision bonds are underwritten. Here, Daniel Young, Contract Underwriting Officer, briefly explores how subdivision bonds stand apart from other contract bonds.

  1. Ownership structure

    Unlike typical construction ownerships, which can involve an entity owned by an individual or small number of individuals, real estate development entities can assume a wide variety of ownership structures. These can include—but are not limited to— LLCs, limited partnerships, general partnerships, individuals, non-profits, government entities, and trusts.

    Dan explains that often in the Subdivision space, underwriters will see development projects owned by multiple project-specific entities. “Commonly we’ll see project-specific entities as LLCs, but in some cases owned by other LLCs, partnerships, or corporations between the development entity (bond principal) and the individuals that ultimately own it,” he says.

    He further explains that the first step in underwriting subdivision bonds starts with a review of the ownership structure of the developer and the relevant operating agreements, partnership agreements, etc. needed to understand and document the ownership of these often-complex entities.

  2. Personal Indemnity

    Due to the varying ownership structures that can be involved, Subdivision underwriters typically place emphasis on personal indemnity of the individuals that own the business entity and less on the business entity itself. “This is another important distinction. While personal indemnity may be required to support traditional contract surety business, it isn’t the primary basis for support,” says Dan. “Where other contract surety underwriters are generally looking for the business entity to financially support the surety needs of the account, we’re more interested in personal indemnity of the owners of the business entity.

    There are multiple reasons for this. First, as developers tend to form new entities for each new project, often the developing entity holds limited assets, all related to the project at hand. Those assets typically include land, work-in-progress, and are usually encumbered by a lien for the benefit of a project lender, leaving little as security for the surety. Additionally, project-specific entities may be “wound down” prior to the release of all the bonds required for the project.

  3. Improvements funding

    Last but certainly not least, explains Dan, is to determine who is responsible for paying for the improvements. Under a traditional contract obligation, the contractor receives payment for the work completed from the project owner. Contrast that with a subdivision bond, in which the developer provides a guarantee to the oblige (project owner) that it will not only complete specified improvements but will do so at no cost to the bond obligee.

    “Therefore, there is a project financing risk involved in Subdivision which isn’t present in a contract obligation. To address this risk, the surety underwriter will attempt to make sure there is a committed funding source sufficient to pay for the improvements to be constructed. This is an important piece of underwriting Subdivision,” he said.