Surety Bonds and Bonding
Questions and Answers

What is Surety?

Surety is not Insurance, it is intended to only assure and protect the "obligee" not the "principal" (applicant).
Surety is the act of a person or corporation making themselves liable for another's debts, defaults or obligations, etc... In other words, it is acting as a co-signer or guarantor for a specific deposit, performance or contract. 

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What does Bondable mean?

Bondable does not mean that the contractor has a license bond. 
All Licensed Contractors are Required to post a license bond in order to be Licensed. Bondable Actually  means that the Contractor's capital, character & capacity have been analyzed by a Surety Underwriter. The Surety Underwriter has then determined that the Contractor can perform certain types of work within established parameters. Based upon that determination, the Surety Company will issue Surety Bonds guaranteeing the Contractors performance and/or payments within the resolved guidelines.

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What is a Surety Bond?

A surety bond is a written agreement indemnifying another guaranteed by the surety company should there be a failure by the principal bonded to perform specific acts within a stated period.

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Who are the Parties to a Surety Bond?

Surety, obligee and obligor (principal). Surety obligates itself to a second part (obligee) to answer for the default of a third party (principal).

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What is a Contractor's License Bond?

Before a contractor's license can be issued or renewed (or an inactive license reactivated), the contractor must file with the Contractors State License Board (CSLB) a Contractor's License Bond (or a cash deposit). The bond in California is in the amount of $10,000. 

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What is a Disciplinary Bond?

If a contractor's license is suspended or revoke due to a violation of the Contractors License Law, the contractor must file a Disciplinary bond with the CSLB if the contractor's license is to be reinstated or reissued or if he/she wants to get a new license. Disciplinary Bond amounts are for at least $15,000, but can be larger and the bond must be on file with the CSLB for at least two years, and sometimes longer.

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What is a Bid Bond?

A Bid Bond is issued by the Surety to the owner of the project in lieu of a required cash deposit. The cash deposit (usually 10% of the bid amount) is subject to full or partial forfeiture if the contractor is the low bidder and fails to either execute the contract or provide the required Performance and/or Payment Bonds. In other words, the bid bond assures and guarantees that should the bidder offer the low bid, the bidder will execute the contract and provide the required surety bonds.

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When is a Bid Bond Required?

Nearly all Public Sector jobs and many private ones require the posting of a bid bond or cashiers check at the time the bid is submitted.

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When is a Performance/Payment Bond Required?

Performance/Payment Bonds (Final Bonds) are usually required on all Public Sector jobs and many Private ones. Whoever initially requires bid bonds customarily need to be issued final bonds within 30 days of the award date or prior to any contract payment.

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What does a Bid Bond Cost?

The Surety Company normally charges an annual Bid Bond Service Undertaking Fee ranging from $200-$350. This fee covers the charges for any and all bid bonds provided within that time period.

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What is a Performance/Payment Bond?

A Performance Bond is a non-cancelable commitment issued by the surety to the owner of the project (obligee) guaranteeing that the Contractor will complete the referenced contract within its set terms and conditions. In other words, the surety is in effect co-signing the contract. A Payment Bond guarantees that all sub contractors, labor and material suppliers will be paid leaving the project lien free.

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What does a Performance/Payment Bond cost?

The premium rate for Performance/Payment Bonds varies upon the contract price, type of work, strength of the Contractor and the Surety Company. The rate can range from less than 1% to over 4% of the total contract price. The Payment Bond is added at no additional charge. A Payment Only Bond is rarely requested and is billed usually at about 50% of the regular premium. Premium is based upon the actual job not lasting more than 18 months. Any jobs longer than 18 months accrue additional premium. Premium is always based upon the contracts Final Value.

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What is the Miller Act?

The Miller Act, enacted by Congress in 1935, requires that any contractor performing a Federal Construction contract post a Payment Bond along with their Performance Bond. This ensures that all Federal buildings a properties remain free of liens filed by unpaid suppliers of materials and direct labor.

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What is a Subcontractor Bond?

A bond required by a general contractor of a subcontractor guaranteeing that the subcontractor will fully perform the subcontract and pay for labor and materials.

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What is a Maintenance (Warranty) Bond?

A Maintenance (Warranty) Bond, while not normally required, can sometimes be required by the owner of a construction project. It provides coverage for defective workmanship or faulty materials discovered after the project has been completed. The bond typically has a financial limit at around 10% of the final contract amount.

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What is a Supply Bond?

A Supply Bond is submitted by a contractor/supplier to another party once he has been awarded a contract to supply a specific product to the other party. A Supply bond guarantees contract performance by the contractor/supplier, according to the contract specifications, terms and conditions. The surety backs this guarantee up to the financial limit of the bond (which is often at 50% or 100% of the contract amount).

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What is a Subdivision Bond?

Subdivision Bonds are submitted by a developer/home builder to the local municipality or county at the time he/she wants to file a lot map or obtain a building permit. Subdivision Bonds guarantee that specified improvements--such as streets, sidewalks, curbs, gutters, sewers, water main--will be installed by the developer/home builder within a certain time period and according to the governing body's requirements. The surety backs this guarantee up to the financial limit of the bond.

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What are License & Permit Bonds?

These are bonds which are required as a prerequisite to obtaining a license or permit for a particular profession, occupation or activity. They can be required by the state or some local municipality or regulatory body. To understand a specific license or permit bond obligation, it is necessary to review the statute, ordinance or regulation from which the bond originated, along with the language of the bond form itself. Generally, a License or Permit Bond requires that the principal comply with the laws, statutes, ordinances and regulations pertaining to that particular license or permit. This bond is usually written for a one-year term.

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Can any Contractor get Bonded?

No. The purpose of requiring Surety Bonding is to have the Surety Company thoroughly analyze the capabilities and capacity of the Contractor to verify their ability to complete the project in the desired manner. Since the Surety Company is not in the contracting business and therefore has no desire to end up with having to complete the guaranteed work, they are very particular about the Contractors they bond.

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Does that mean that the new Contractors and 
those that have had some problems are excluded from Bonding?

Again no. As previously discussed, there are a variety of Surety Companies and Surety Programs available. Many include special arrangements or SBA backing for Emerging Contractors or those with explainable prior difficulties. Currently a few sureties have a simple single page application for contracts around $100,000 or less. The extension of surety credit for these small contracts is based solely on the established credit of the applicant. This is where your agent becomes most important. The experienced Surety Agent can usually find some Surety support for any worthy contractor.

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What does it take to get setup with a Surety Company?

Ideally, the Surety Company wants to see three years of Reviewed, CPA prepared business financial statements along with Work in Progress Schedules, Accounts Payable and Accounts Receivable Schedules, Company & Contractor Histories, Bank References and thoroughly completed questionnaire (often, surety support is established with less). The Surety Agent's job is to retrieve this information from the contractor, verify its completeness, evaluate the provided information and submit it to the Surety Company that will best match up with the contractor's needs and capabilities. As indicated above, a few sureties have a simple single page application for contracts around $100,000 or less. Surety for these small contracts is based solely on the established credit of the applicant.

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What determines the size of the jobs a Contractor can bond?

The Surety Companies use various underwriting guidelines to ascertain what Surety limits are applicable. Financial strength, prior job history, time in business and type of work are some of the components. The Surety Agent usually works with the Contractor to present the most favorable illustration for the Surety Company to review.

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