Construction Bonds for Private Construction Projects

Project owners, contractors, banks, and financial institutions involved in private construction projects often require construction bonds. These stakeholders seek assurance that the project will be completed in accordance with the terms set by the contract, minimizing financial risks and ensuring that subcontractors and suppliers are compensated.

Understanding the types of construction bonds a private project requires is an important first step to acquiring the right bonds: 

1. Bid Bonds

A bid bond makes sure contractors follow through on their bids, preventing project owners from wasting time and money if the bidder backs out later. It gives the owner financial protection by compensating them for the cost of restarting the bidding process. 

2. Performance Bonds

A performance bond guarantees that the contractor will complete the project as agreed. Private owners are increasingly using these bonds to safeguard investments and prevent financial loss. 

3. Payment Bonds

Payment bonds guarantee the contractor will pay all laborers, material suppliers, and contractors per the agreements made. 

4. Maintenance Bonds (Warranty Bonds)

Maintenance bonds, also called warranty bonds, ensure any defects that show up after a completed project won’t result in financial harm to the project owner. 

5. Supply Bonds

Supply bonds guarantee the timely delivery of materials specified in the contract. However, they do not cover labor or installation costs.

While public projects mandate construction bonds under the Little Miller Act, private construction projects don’t fall under this legislation. However, bonds are increasingly common in private projects, especially higher-value projects or those involving significant financial investments to safeguard the interests of all parties involved.

A private construction bond acts as a legal agreement between the contractor (principal), a project owner (obligee), and a surety agency (insurance provider). The surety will ensure the contractor fulfills their contractual agreement and completes the project according to the agreed-upon terms. If the contractor fails to uphold their side of the contract, the project owner can then make a claim against the bond to recover any and all financial losses. 

Project owners, contractors, banks, and financial institutions involved in private construction projects often require construction bonds. These stakeholders seek assurance that the project will be completed in accordance with the terms set by the contract, minimizing financial risks and ensuring that subcontractors and suppliers are compensated.

Contractors applying for construction projects generally follow these steps to acquire the appropriate bonds: 

• Review the contract to see which bonds will be required. 
• Identify the bond amount, which is often a percentage of the contract. 
• Choose a surety agency like Surety Bond Professionals with experience in construction bonding. 
• Work with one of our experienced agents who understands the private project requirements. 
• Prepare documentation such as business and personal financial statements, bank references, and credit history. 
• Complete the bond application in accordance with the instructions given by your agent. 
• Undergo a surety agency evaluation. 
• Once approved, pay the premium required. 
• Maintain compliance throughout the project to avoid claims. 

Applications may be denied due to poor financial health, insufficient industry experience, inaccurate documentation, unstable business operations, or prior bond defaults. If the project itself exceeds the capacity of the contractor or is in a high-risk industry, it may also be difficult to obtain surety bonds. 

Furthermore, some contracts do not qualify for construction bonds from domestic surety agencies. Some examples are any projects overseas or on the lands of sovereign Native American nations, projects involving private home remodeling, or even multi-year construction projects. This is because the applicable laws may differ from typical US laws, leaving the surety agency in a risky position when the contractor defaults. Long-term projects pose challenges for surety agencies because contractor qualifications, financial stability, and project viability can change over time. 

By authorizing a construction bond, the surety is agreeing to extend credit to the principal to cover the cost of a claim if the principal is unable to pay it immediately. That carries the risk of not being repaid by the principal and having to take legal action to secure repayment.

The cost of a construction bond is determined by multiplying the bond amount by the premium rate. A strong credit score can lead to lower premium rates, typically ranging from 0.5% to 3% of the bond amount.