Colorado Construction Bonds
Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
What Are They?
A number of different types of surety bonds fall into the category of Colorado construction bonds. These are bonds that are required from construction contractors operating in the state of Colorado. Some are required by the state itself, while others are required by public and/or private construction project owners.
All construction bonds serve a protective purpose. They protect the party requiring the bond (the “obligee”) against financial harm due to the contractor’s regulatory or contractual non-compliance. They obligate the contractor (the “principal”) purchasing the bond to operate in accordance with specific state and/or local statutes. And if a violation causes monetary damages to the obligee or, in some cases, a member of the public, the injured party can file a claim against the bond and be compensated for the loss. For more information on bonds you may need see below:
- Colorado Bid Bonds
- Colorado Performance Bonds
- Colorado Payment Bonds
- Colorado Maintenance Bonds
- Colorado Contractor License Bond
- Colorado Subdivision Improvement Bonds
What Colorado Construction Bonds May Be Needed?
The types of construction bonds commonly needed by Colorado contractors include contractor license bonds, bid bonds, performance bonds, payment bonds, maintenance bonds, and subdivision bonds.
How Do They Work?
Any Colorado construction bonds is a legally binding agreement among three parties—the obligee, the principal, and the bond’s guarantor, known as the “surety.” Each of the three parties plays a different role:
- The obligee determines the required bond amount—the maximum amount that will be paid out on claims. This is also referred to as the bond’s “penal sum.” The obligee also determines the bond’s term or duration. Some construction bonds need to be renewed annually, some are good for two years, and others must be maintained indefinitely.
- The surety investigates claims to make sure they are valid and should be paid. As the bond’s guarantor, the surety agrees to extend credit to the principal to ensure that valid claims are paid on a timely basis. The surety is also the party that sets the premium rate for each bond applicant.
- The principal is legally obligated to pay all claims the surety finds to be valid.
One thing people find a little unusual about construction surety bonds is the way that claims are paid. Although the principal bears the legal obligation for paying claims, it’s unusual for a principal to have enough cash on hand to pay a valid claim immediately without causing cash flow issues. So the surety typically will pay a valid claim initially as a loan to the principal to be repaid by the principal.
If the principal does not make full repayment according to the surety’s terms, the surety can take legal action to recover the debt. If the matter ends up in court, the principal can end up having to pay court costs and legal fees on top of the claim amount.
What Do They Cost?
As noted earlier, the obligee sets the bond’s penal sum, and the surety assigns the premium rate. Multiplying these two factors yields the annual premium the principal will pay for a Colorado construction bond.
Nearly all construction surety bonds are subject to underwriting, which is the process through which the surety determines the appropriate premium rate. The primary underwriting goal is to assess the risk a given principal presents to the surety—specifically, the risk of not being repaid for claims paid on behalf of the principal.
The surety may require the principal to submit financial statements and other documentation of their financial strength and stability. But the most common metric for measuring risk is the principal’s personal credit score.
A high credit score is a reliable indicator of a low-risk level, which should result in a low premium rate. A low credit score indicates higher risk, which warrants a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of 0.5 to 3 percent.
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