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Bonding for Federal Construction Projects
Any number of things can happen during a federal construction project that potentially could prevent the project from being completed or end up costing taxpayers more than originally budgeted. Construction bonds (also referred to as contractor bonds) provide financial protection for the federal government. Learn more below, and apply today through our convenient online system.
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Learn more about federal construction bonds, or contact our experienced surety agents for assistance with any questions you may have.
This was enacted because government property cannot have a mechanic’s lien placed upon it, which means subcontractors and suppliers risk non-payment. The Miller Act enforced two requirements to prevent this:
- Performance Bonds – These guarantee that the contractor will complete the project according to the terms of the contract.
- Payment Bonds – These ensure that subcontractors, suppliers, and laborers receive payment for their services. If a contractor fails to pay, the bond ensures financial protection for those involved.
Are There Any Exemptions to the Miller Act?
There are some exemptions for the Miller Act requirements and these include:
- If a project falls below the $100,000–$150,000 threshold, it may still require alternative financial assurances, such as irrevocable letters of credit or escrow agreements.
- Projects awarded under emergency provisions or certain small business set-aside programs, where the federal government may waive bond requirements.
- Some federal projects fall under alternative procurement methods.
If a smaller project falls below the $100,000–$150,000 threshold, they may still need other forms of financial assurance, like irrevocable letters of credit or escrow agreements.
The most common types of bonds required for federal construction projects are performance bonds, payment bonds, bid bonds, and supply bonds.
Performance bonds
One of the biggest concerns with federal construction projects is that the contractor could become insolvent and default on a contract or that the quality of work will be substandard, requiring it to be redone by another contractor. Performance bonds guarantee satisfactory project completion in accordance with contractual requirements and guarantees that funds will be available to compensate the project owner in the event that the contractor fails to live up to that performance guarantee.
Payment bonds
Payment bonds usually are required in conjunction with a performance bond to guarantee payment of laborers, subcontractors, and suppliers in accordance with contractual obligations.
Bid bonds
Bid bonds may be required from contractors bidding on a federal construction project as a way to ensure that the winning bidder will go ahead and accept the contract. Such bonds will compensate the federal project owner for the cost of having to go through the bid solicitation and evaluation process again to select another contractor, should the awarded contractor decide not to proceed with the contract. It is standard to provide a 20% bid bond as security on bids for federal government contracts.
Supply bonds
A supply bond sometimes is required as a guarantee that money paid to a contractor for the purpose of purchasing supplies actually is used for that purpose. It also ensures that the contractor doesn’t cut corners and substitute inferior materials for those specified in the contract.
Repaying the surety for claims paid on the principal’s behalf is not optional, as the surety is indemnified against any legal liability for claims. The principal’s legal obligation to pay claims simply shifts to repaying the surety. Failure to do so can result in the surety taking legal action against the principal.
The best indicators of risk involve the principal’s financial capacity, prior work portfolio, and credit score. The surety will use these metrics to assess the risk and determine the bond capacity (limits) of the subject contractor.
If the contractor fails to meet the terms of the contract, then the federal government, subcontractors, or suppliers can file a claim against the bond. First the surety will investigate to see if the claim holds validity. If the claim is legitimate the surety will pay the obligee (the claimant). At this point, the contractor is legally required to repay the surety for the amount paid on their behalf. Failing to do so can lead to legal action and difficulty obtaining future bonds.
Factors That May Influence a Contractor's Bonding Capacity
Factor | How It Affects Bond Capacity |
---|---|
Financial Strength | Surety agencies review financial statements, cash flow, and profitability. A strong balance sheet increases bonding capacity. |
Credit Score | Higher credit scores show lower risk, leading to higher bond limits. Poor credit may require collateral or increased scrutiny. |
Industry Experience | Contractors with a proven track record in similar-sized projects qualify for larger bonds. |
Past Performance | A history of completed projects without defaults reassures sureties and strengthens bonding potential. |
Existing Workload | A contractor’s total active projects influence whether they can take on additional bonded work. |
Collateral or Indemnity | Some bonds require personal or business collateral, especially for high-risk contractors or large projects. |
Working Capital | Surety agencies consider available liquid assets (cash, accounts receivable) to ensure a contractor can fund project costs before payments are received. |
How to Increase Bond Capacity
If a contractor's bonding capacity is too low for a federal project, there are steps they can take to improve this:
- Reduce debt, improve cash flow, and maintain strong liquidity.
- Build a better credit history by avoiding late payments and resolving debt.
- Complete mid-sized projects successfully and progress to higher values.
- Work with an experienced surety agency who can help you create a plan to achieve success.
Get A Quote Today
Do you need a construction bond for a federal construction project? Get bonded with an established surety agency today.
With over 75 years of experience serving clients nationwide, Surety Bond Professionals is here to help with all of your construction surety needs. To get a quote for a construction bond or any other required surety, simply fill out our online quote form: