did you know?
Every year, surety companies bear billions of dollars in liabilities because of contractors' failures.

Federal law (The Miller Act) and state laws ("Little" Miller Acts) demand bonds on all public contracts above $100,000.00. Responsible owners of private sector construction projects require bonds to protect themselves and their associates from contractors' failures.

Three types of bonds exist:

• bid bonds guarantee a contractor will honor his bidding price
• performance bonds guarantee the timely and conscientious completion of a contract by a contractor
• payment bonds guarantee the fiancial compensation of workers, subcontractors and suppliers
  

Contract bonds also:

• smooth the transition from construction to permanent financing by eliminating liens
• relieve owners from risks of financial losses arising from liens filed by unpaid laborers, suppliers, and subcontractors
• reduce the odds of a contractor diverting funds from the project
• lower the cost of construction by facilitating the use of competitive bids

Before issuing a surety bond, the surety needs to be convinced that the contractor:

• is of good character
• has the appropriate experience to complete the project
• owns or can procure the necessary equipment to complete the project
• has the financial strength to support the desired work program
• has a solid credit history
• has established a banking relationship and lines of credit

If a contractor with a surety bond defaults, the surety may:

• pay for a replacement contractor
• finance the existing contractor or provide the original contractor with technical and/or financial asssistance
• Surety shares many of the characteristics of bank credit. Although it does not lend the contractor money, the surety does allow the contractor's financial resources to be used as collateral against the possibilty of default.

To bond a construction project, an owner simply includes the bond requirement in the project specifications. Obtaining and delivering bonds is the responsibilty of the contractor, who consults an independent bonding agency.

Costs for bonds are generally somewhere between one to three percent of the contract amount.