The phrase “payment and performance bonds required” often signals a dead end for contractors who’d like to bid on public work or large private projects, but who are inexperienced in the bonding world. The bonding process, however, doesn’t have to be mysterious. Consider the following:
- The most common types of construction bonds are performance and payment bonds — kinds of surety bonds.
- A payment bond guarantees the owner that the contractor will pay all the supplier and subcontractor bills associated with the project and that the project will be completed in a timely manner, with quality.
- A bid bond guarantees the owner that the contractor will be able to meet contract requirements for the amount of the submitted bid.
- Surety bonds are obtained through insurance agencies, but are more like a line of credit than an insurance product.
The process to obtain payment and performance bonds can be rigorous. Qualifying for them is similar to trying to get a bank loan. The bond qualification process includes the following:
- How much money you have in the bank.
- Your credit history.
- Your proven project track record — the surety company will be on the lookout for prior contract defaults and evidence that your company has met prior contract obligations.
- Your resources — whether you have the skill, experience, employees and equipment to perform the work.
- What your balance sheet looks like — credit history, cash flow and working capital.
Build a relationship with a surety agency as soon as possible.
- Practice financial housekeeping.
- Clean up internal and reporting systems.
- Make sure your financial ratios look good.
- Determine whether you need an audit.
If you build a relationship with a surety agency, when you need a $20 million bond, you’ll be ready. No matter what the size of your business, you may require the extra security that a bond provides. Private owners see payment and performance bonds as a risk management tool.
If you go through the bonding process, you may experience disputed change orders, weather delays or antagonistic relationships between a project manager and an owner’s representative. Although subcontractors may file a claim against the project’s payment bond —
- Turning to bonding or surety agencies can help you find creative and equitable solutions. Notify the surety agency as soon as possible if you are experiencing trouble executing a project — this will enable you to seek a solution together.
- It may be possible to come out relatively intact. Surety agencies help when they’re working with contractors they have a relationship with who have good track records and are known to be reliable and responsible.
- Whether because of financial or performance issues, contractors may have to default on a project at some point. If you’ve obtained a valid contract bond prior to starting work on a project, you can file a claim against the contract bond and get the surety agency involved to resolve the situation.
If you decide to seek a bond, or just want to understand your options, give us a call, and we’ll help you identify what is appropriate for your company.