BONDING: WHAT'S IT ALL ABOUT?
 

Most surety contract bonds -- in the form of Bid, Performance and Payment Bonds -- are written on public work, which includes federal, state and local projects. Because construction is a risky business, laws are in place which require bonds on public work construction projects; to protect the public funds being used.
 

What does bonding mean to the contractor?
 

Bonding can mean bigger and better jobs for the contractor. Being bondable also reduces competition.
 

What are Bid, Performance and Payment Bonds?
 

  • The Bid Bond guarantees that the contractor who bids the job will enter into the contract and supply the performance and payment bonds as required.
  • The Performance Bond guarantees that the contractor will perform according to the terms of the contract.
  • The Payment Bond (also called Labor & Material Bond) guarantees that employees, subcontractors and suppliers that perform work or supply materials to the project will be paid.

So what does it take to get bonded?
 

The following are some of the factors (the three C's) for determining your "bond-ability".

  • Character: The Surety company will seek to determine the contractor's strength of character and his/her reputation in the eyes of his/her customers and associates.
  • Capacity: This represents your company's ability or capacity in manpower and expertise to tackle the job you want bonded.
  • Capital: The Surety company will seek to determine whether the contractor has the financial strength to effectively run all of the work that it currently has in progress and plans to start in the foreseeable future.
     

What informational items will a surety require?
 

Most surety companies will (at a minimum) require the following:

  • An organizational chart
  • Current financial statements (prepared by an accountant or CPA)
  • Financial statements for the last two years
  • Resumes of key people
  • Record of contract performance
  • Status of work in progress
  • A business plan
SBA BOND LINE GUARANTEE PROGRAM: A GREAT OPTION FOR A YOUNG CONTRACTING COMPANY
 

By law, prime contractors to the federal government must post surety bonds on federal construction projects valued at $25,000 or more. Many state, county, city, and private sector projects require bonding. The SBA can guarantee bid, performance and payment bonds for contracts up to $1.25 million for small businesses that cannot obtain bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract.
 

SBA Bond Line Guarantee Program
 

  1. Surety charges 2% 
  2. SBA charges $6 per thousand dollars of the contract amount. 
  3. Unsecured line(s)-of-credit are treated as an increase to working capital 
  4. Two products in one (a) single amount (b) aggregate amount 
  5. Bond level computation: 10 times working capital. 
  6. Recommended Growth: 1 times your largest project 
  7. Type of financial statement required:
     

    Bond Level($)

    Type of Financial Statement

    $200K - $300K

    Compiled Statement

    $301K - $2.5M

    Reviewed Statement: Accountant Required

    $2.51M and Higher

    Audited Statement: Accountant Required

Typical Surety Bond (without SBA)

Surety Charges:

  • 2.5% for Bonds less than or equal to $100K
  • 1.5% for Bonds between $100K and $500K
  • 1.0% for Bonds greater than $501K
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