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.

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.

It is more difficult, but not impossible, for new companies to secure bonding . In addition to pro forma financial statements, the surety would require personal indemnity of owners and spouses along with some form of collateral. This can be in the form of a certificate of deposit or letter of credit, obtained from your bank, which is held by the surety as security for your bond(s). Once the job is completed and the Owner releases the bond requirement, your collateral can be returned to you from the Surety company.

Bonds provide small contractors with numerous benefits. The surety bond provides protection against contractor default. The surety company helps the contractor avoid costly delays and contract disputes, by intervening before it’s too late. When a project is bonded, there’s also an added layer of payment protection for workers and suppliers of the contractor. Surety bonds help level the playing field, and allow a small contractor to compete in the free market, leading to lucrative contracting opportunities.

A Principal is legally obligated to reimburse the Surety Company for any loss and expense incurred by the Surety. The Principal’s obligation to the Surety can, therefore, be greater than the original obligation to the obligee. The Surety has the same recourse against the Principal as any other creditor would have in recovering their loss. This is the primary difference between a surety bond and insurance.

The Surety’s claim department will conduct an investigation as quickly as possible to avoid any further damages and mitigate their exposure. It is important to note as the Principal under a bond, that a pending claim does not necessarily mean there will be a financial loss incurred since the dispute may not even be legitimate. If the Surety does determine through their examination that the claim is valid, the Principal will be reminded of their obligations under the indemnity agreement and given the opportunity to satisfy the claim first. If the Principal fails to respond, the Surety will arrange settlement with the Obligee, and implement collection proceedings against the Principal.

Once you know what your buyer wants, you need to approach your bank, a surety company, surety broker or insurance broker. A bank will provide a letter of guarantee and a surety company will provide a surety bond. There are pros and cons to both types.

Letters of Guarantee are not cheap. When your bank issues a letter of guarantee, you have to pay a fee to have it issued and your line of credit is debited. This can lead to a cash flow crunch. You are also exposed to extra risks because your buyer can call the guarantee at any time without cause.

Surety bonds don’t cause as much of a cash flow crunch because, only in the most extreme cases, will a surety company demand 100 % cash collateral. As well, buyers will, at times, pay fees associated with a surety bond. On the other hand, these bonds are not as easy to get as bank guarantees.

The amount of time to obtain your bond depends on several different variables. The most important being how long it takes you to respond to what is needed. The faster you get your agent the information they need to write the bond, the faster they can send it up to the bonding company for approval. Of course there are other variables, such as how busy the bonding company’s underwriters are at any given time. At Bernard Fleischer & Sons, Inc. we make sure to process your bond as fast as possible.

Surety bond premiums vary from one surety to another, but can range from one-half of one percent to two percent of the contract amount, depending on the size, type, and duration of the project and the contractor. In many cases, performance bonds incorporate payment bonds and maintenance bonds. When bonds are specified in the contract documents, it is the contractor’s responsibility to obtain the bonds. The contractor generally includes the bond premium amount in the bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium will be adjusted for the change in contract price. Payment and performance bonds typically are priced based on the value of the contract being bonded, not necessarily on the size of the bond. Commercial bonding has a greater range of pricing; high risk programs have a high premium and 10% collateral.

A surety company must determine the probability of a loss should the principal be unable to complete their obligations under the bond. Since a bond is an extension of credit, the surety company must analyze the principal’s financial standing and business aptitude to determine if the principal has the financial strength and business knowledge to support the bonded obligation. This is called the underwriting process. Surety company underwriters evaluate risks in ways similar to banks evaluating loan applications. Underwriters consider business and personal financial statements, credit reports, credit references and other factors.