Category: Construction Bond

To Bond, License and Insure?

Starting your own construction business can sometimes be a leap of faith. But that faith in your business is stronger if you learn about the industry.  For example, it is important to know the benefits of being a licensed, bonded and insured construction company. Why should I be licensed and apply for permits? The simple answer is for protection, for you and your customers. It may be easier to cut corners and not apply for permits or licenses. But, if you want to have a long standing and respective business, licenses and permits are the way to go. First, you will need a general business license.  Beyond that, it is important to check with your local government and state offices to see which other license you may need. Permits are important because they help you to maintain valid parameters. By pulling a permit, you have sought the approval of your local government offices to perform the work that your customer wants. What about insurance, do I need insurance? How many insurances you need depends on the work you perform. If you directly employ workers, then you will need an insurance to protect yourself. If you drive your truck for...

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Ancillary BondBid BondConstruction BondPayment BondPerformance Bondsubdivision bond

Common Surety Bond Terms Every Contractor Should Know

For commercial construction contractors, securing a surety bond is often the key to winning public work and scaling up to larger private projects. Along the way, you’ll encounter specialized surety terminology that isn’t always easy to understand. This quick-reference guide explains the essential surety terms, financial concepts, underwriting terminology, and construction bond types every contractor should know to navigate the bonding process with confidence. New to surety bonds? Start with our Construction Surety Bonds Explained guide for an overview of how surety bonds work before exploring the terminology below. The Three Parties to a Surety Bond Every surety bond is a legally binding agreement involving three distinct parties. Understanding each party’s role is fundamental to knowing where the financial responsibility ultimately lies. Party Definition Principal The contractor or construction business required to obtain the bond and fulfill the obligations of the contract. Obligee The project owner, municipality, or government agency requiring the bond to protect public or private funds. Surety The specialized bonding company that financially backs and guarantees the contractor’s obligations to the obligee. The Five Most Common Construction Bond Types These are the core construction bonds contractors encounter most frequently when bidding on and executing projects. Bond...

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Surety Bond Vs Letter Of Credit – What’s The Difference?

There are many financial products that help a construction company to grow, both in the private and public sector.  Two of these products, a surety bond and a line of credit, can be helpful in becoming more successful.  Knowing the difference between the two can help your business to grow. Surety Bonds vs Lines of Credit To start, both surety bonds and lines of credit (LOCs) provide financial protection. Yet surety bonds tend to take that protection a step further.  By definition, a surety bond is a three party agreement between the project owner, the surety bond producer and the contractor.  Two of the most utilized surety bonds in the industry are performance bonds and payment bonds.  A performance bond ensures that the contractor upholds the contractual obligations specified in the contract.  A payment bond guarantees that the contractor pays all associated with the project.  This can be anyone from laborers to subcontractors, material suppliers and other employees as specified in the contract.  A LOC is a cash guarantee.  It allows the owner to call upon it on demand.  It works as a payment to the owner, but is an interest loan for the contractor. A surety bond is based...

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ClaimsSurety Bonds

How Claims Hurt

We’ve emphasized, in previous blogs, that a contractor has control in avoiding claims.  The best way to avoid having a claim filed is to make sure that the contractor fulfills and documents all contractual obligations.  But, if the contractor is not able to fulfill the contractual obligations, a claim may be filed.  This will hurt the  reputation of the contractor in many ways. The Financial Burden of a Claim First of all, the financial burden will be evident once the contractor is found to have defaulted on the contract.  The contractor may have to pay the full amount.  They may also have to pay any legal fees associated with the claim.  A surety bond is not meant to protect the contractor. Instead it ensure the project owner that they will not lose out on money if the contractor defaults on the contract.  If the surety bond producer deems that the contractor has defaulted on the contract, they will pay the project owner.  They will then seek reimbursement from the contractor. The Risk of Ignoring Claims But what if the contractor decides not to pay the claim? They may feel they weren’t in the wrong or may not have the financial...

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The Importance of a Work In Process Schedule for the Contracting Company and the Surety Company

A Work in Process schedule (WIP) helps contractors document the progress of their project.  A WIP also helps the surety company to evaluate the progress of the project as well.  A well-documented WIP can help the contracting company earn future approval for surety bonds. In a general WIP, some of the things documented are the contract price, billings to date, costs incurred to date, estimated completion cost and estimated gross profit. These help the contractor show that they are completing the project on time and without additional costs. The reasons a WIP is important for a surety company is that it helps to monitor profitability, any errors and profit fade and gains that may happen.  The surety company is also able to evaluate billing practices of the contracting company.  A WIP also helps to back up the contractor’s financial strength on the project. It is important to have Certified Public Accountant (CPA) organize the contractor’s financial records, to provide to the surety company. Summary: A WIP is important for both the contractor to stay on schedule and document any shortcomings.  It is important also for the surety company to monitor and evaluate progress and any discrepancies. A proficient WIP can help...

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Warning Signs that may Deter your Bond being Processed

Many contractors find that the surety bond process can be complex. But, having a competent and knowledgeable surety bond producer is the first step to making sure your project will get underway. By answering the following questions, a contractor may be able to determine if there may be a delay in approval. Questions to Consider: 1. Is there already a claim open with the current surety? If another application has not yet been approved, that may be a warning sign that there is a reason for the delay. The best way to correct this is to (a) resolve any issues with the surety bond claim and (b) work with the surety bond producer, if both parties cannot resolve the issue on their own. 2. Is the project within the realm of the contractor’s expertise? If not, the underwriter may worry that the lack of  understanding of the project may delay it.  The best way to remedy this is to explain why the contractor is bidding on the project, how the contractor will avoid and/or solve any potential risks and why the contractor is seeking this particular project. 3. Is the project outside of the home turf? If the contractor is bidding on a...

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