What You Need to Know To Get a Surety Bond as a New Contractor

New contractors have a lot of matters to anticipate when entering the construction industry for the first time. One important consideration that sometimes slips through the cracks is the use of surety bonds. Unfortunately, new contractors are often unfamiliar with the bonding process, which includes undergoing finance and credit checks, providing upfront collateral, and paying issuance fees. Being aware of bonding regulations within the construction industry can help a new contractor keep on track. Building Maintenance York County | Central Penn Contracting Services is the trustworthy contractor.

How construction bonds work
Surety bonds offer financial protection similar to insurance, although there is a distinct difference in how they work. While insurance policies are written with the understanding that some claims will be made, surety insurance bonds are written to prevent fraud and other potential problems—with the intention of avoiding claims. This is why the bonding process can be strenuous for new contractors—the surety provider wants to make sure he is backing the work of a reputable professional who won’t perform inadequately.

Construction bonds work like other surety bonds, but they apply to stakeholders in the construction industry. Most construction projects require contractors to secure one or more bonds before beginning work. Each individual bond acts as a contract between three entities:

1. The principal—(usually) a contractor who needs the bond before beginning work on a project, thus guaranteeing the quality of his work
2. The obligee—the entity (typically a government agency) that requires the bond, thus receiving its legal financial protection
3. The surety—the agency that issues the bond to the principal, thus guaranteeing the contractor’s work to the obligee

Construction bond regulations
Regulations regarding the use of bonds in the construction industry vary depending on the specific jurisdiction in which the project is to be completed. The Miller Act requires the use of bonds on all public construction projects that exceed $100,000. The law mandates the use of two types of construction bonds:

• performance bond—to guarantee the contractor will perform all duties as outlined in the contract
• labor and material payment bond—to guarantee the contractor will make all necessary payments throughout the project’s duration

Some jurisdictions also require the use of bid bonds to guarantee that a bidding contractor will enter into a project contract if selected by the owner.

Failure to abide by the restrictions mandated by each of these bonds allows a harmed or unpaid party to make a claim on the bond. If the contractor cannot provide the obligee with appropriate reparation, then the surety can be accountable and could be left paying compensation up to the bond’s full value.

Construction bond amounts and costs
Bond amounts will vary depending on the nature of the bond and its contractual language. For example, bid bonds typically require the bond amount to be 5% to 10% of the project’s total cost, while it’s not unusual for performance bond amounts to be 100% of the project’s cost. Always check your local bonding regulations to make sure that you’re getting the appropriate bond in the correct amount.

After determining the necessary bond amount, the surety provider will determine a fee to charge based on a number of variables:

• business financial statements from the past 3 to 5 years to determine financial stability
• a resume or list of previous projects to determine a contractor’s consistency
• personal financial and credit information to determine the contractor’s reliability

However, some of these qualifications are obstacles for new contractors who probably don’t have strong, comprehensive financial histories. This means new contractors often pay more than a typical contractor would to get a bond, as the surety takes a greater risk in backing a professional with little experience.

Getting a construction bond
Getting a surety bond for the first time can be stressful, but the more new contractors know about the bonding process ahead of time, the more prepared they will be. Insurance companies have traditionally issued surety bonds, but with the ever-increasing bonding regulations, New York surety bond agencies have established a niche in the bonding market to provide more comprehensive services.

New contractors will want to make sure that they’re working with someone who understands them, their business, and their professional goals. After all, bonding in the construction industry is all about guaranteeing the quality of your work, and that’s something new contractors want to establish right away.

This guest post was written by Danielle Rodabugh. Danielle is a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses across the nation. She has recently been focusing on writing articles to clarify bonding rules and regulations for those working in the construction industry.