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A Contractor's Guide to Surety Bonding In order to bid or perform work on a government-funded project, prime contractors are required to provide guarantees to the contracting agency and the subcontractors participating on the project so that they are protected from contract failure and non-payment. The most common form of insurance on construction projects is a contract surety bond, which is a written three-party agreement between the bonding company, prime contractor, and the state agency. If a prime contractor fails to uphold the terms of the contract, it will be required to monetarily compensate the other parties included in the contract. Without a contract surety bond, it is virtually impossible for a prime contractor to win a bid, let alone manage a construction project.

What are the different types of contract surety bonds?

Since 1893, the federal government has required that all contractors on federally-funded projects obtain surety bonds before performing the work; states have also passed similar legislation. But what are the different types of surety bonds? Under the category of contract surety bonds exists three distinct subcategories of bonds that correlate with each stage of the contracting process:

• Bid bonds, which are submitted with the prime contractor's bid. These bonds simply state that the prime contractor has financial assurance from a bonding company and that the contractor will perform the work at their stated bid price;
• Performance bonds, which provide an assurance by the bonding company that the contractor will meet terms of the contract; and
• Payment bonds, which ensure that all suppliers and subcontractors will be paid in full.

In addition to these required bonds, prime contractors may be subject to providing license and permit bonds, subdivision bonds, and fidelity bonds.

How can my business secure contract surety bonds?

In order to receive contract surety bonds, a business must establish a surety program with a surety provider. To create a well-functioning surety program, businesses can hire a bonding agent that will prepare and organize the documents needed to initiate the process. While each surety provider has different criteria for underwriting a general contracting firm, there are a few basic questions - commonly known as the "three C's" - surety providers ask when considering whether to bond a business:

• Capacity: Is the applying contractor capable to meet the obligations most contracts require?
• Capital: Is the applicant's financial condition stable and does it warrant the surety provider's approval?
• Character: Does the applicant have a history of failing to complete projects?

With this information, the surety company builds a clear picture of the contracting firm's liability and can make a decision regarding surety. Once a working surety program is created between the contractor and the surety provider, a healthy relationship can maintained through open and honest communication and timely reporting of financial statements. As trust is built between the two parties, the surety provider will likely be willing to increase the contractor's bonding capacity when the time comes.

Can small contractors obtain surety bonding?

In short, YES! While many small contracting businesses lack the financial strength and experience necessary to obtain surety bonds through the more common channels, the Small Business Administration's Office of Surety Guarantee's manages the Surety Bond Guarantee program, which guarantees the three types of bonds issued by surety companies to small contractors. If the small business defaults, the government will reimburse the surety provider a percentage of the losses. Essentially, the federal government's guarantees reduce the firm's potential liability.

Are prime contractors required to provide bonding assistance to subcontractors?

Bonding is not required for firms participating on projects as subcontractors; therefore, prime contractors are not required to provide bonding assistance to subcontractors. The prime contractor's bonding is assumed to cover the liability of the whole project. If the contractor would like protection against subcontractor default, however, then they should consider providing bonding assistance to their subcontractors. In fact, surety providers look favorably upon prime contractors that utilize bonded subcontracting firms.