Construction Bonds for State and Municipal Projects

For state and municipal projects, typically contractors, subcontractors, or suppliers are responsible for securing construction bonds. When bidding for a project, they are often required to provide proof of bonding capacity and may need to obtain the necessary bonds before commencing work on the project.

The basic purpose of bonds for state and municipal projects is to protect the entity requiring them (known as the “obligee”) from the financial harm that can occur when a contractor (the bond’s “principal”) violates regulatory or contractual requirements. They do this in two ways: by mandating contractor compliance and legally obligating the contractor to pay monetary damages to the injured party if violations do occur.

There are two main ways bonds benefit state and municipal projects:

• Contractor Compliance: The bond itself serves as a strong incentive for contractors to fulfill their contractual obligations and complete the project according to specifications. Knowing that a financial penalty awaits them in case of non-performance encourages contractors to prioritize project completion and adhere to regulations.
• Financial Protection: If a contractor fails to meet their obligations, the bond protects the project owner from financial losses.  The surety company which issued the bond is then legally obligated to step in and cover the costs associated with completing the project or remedying any issues.

By requiring contractors to obtain bonds, state and municipal project owners can mitigate risks associated with construction projects and safeguard taxpayer dollars.

The Little Miller Act statutes establish project value thresholds for state and municipal projects. To bid on projects exceeding this threshold, contractors typically need to obtain:

• Performance Bond: Guarantees the project’s completion according to specifications.
• Bid Bond (in some states): Protects the project owner if a winning bidder fails to enter the contract.

The required bond amount varies by state; in most states, the required bond amount is 100% of the project value, but in a few, it’s 50% or 75%. Beyond Little Miller Act requirements, some projects might require additional bonds:

• Maintenance Bond
• Subdivision Bond
• Solar Installation Decommissioning Bond

State Construction Bonding Requirements & Thresholds

Municipal construction projects are funded and managed by city or county governments. They require a contractor to secure a bond to ensure they complete the contract, maintain the agreed-upon quality, and provide the project with financial security. Municipal construction bonds protect public funds and help contractors adhere to their contractual obligations.

Municipal Bonding Requirements & Thresholds

Each municipality has its own set of rules for bonding requirements. Common regulations include:

• 100% performance and payment bonds for contracts exceeding $50,000–$100,000.
• Lower bonding thresholds for public works projects (e.g., schools, transportation, water infrastructure).
• Specialized bonds for historical restoration, environmental remediation, or hazardous material handling.

Steps to Find Municipality Bonding Requirements

Step 1: Go to the municipality’s official website and look for sections related to government, finance, legal/code, bonds/debt, and investor relations. The regulations may be there. 

Step 2: Search the website for Code of Ordinances or similar keywords. This may be hosted on a platform like Municode or similar. Within the code, look for chapters related to debt issuance, bonds, and finance. 

Step 3: Contact the municipal government directly if the contact information is on their website. Some municipal offices to contact are The City Clerk or Town Clerk, The Finance Director or Treasurer, and The City Attorney or Legal Department. 

Step 4: Review state laws to see if there are terms such as “municipal bonds,” “local government debt,” or “bond issuance.” 

Step 5: For complex projects, consult with professionals such as attorneys specializing in municipal bonds or financial advisers specializing in public finance.

The annual premium for most bonds is calculated by multiplying the bond amount by the premium rate. The bond amount is established by the obligee, and the premium rate is assigned by the company providing the bond (the “surety”) on a case-by-case basis.  

The premium rate reflects an underwriting assessment of the risk the surety is accepting in guaranteeing the payment of valid claims. That guarantee is an agreement to lend the principal the money to pay a claim, if necessary. In fact, the surety will pay the claim on the principal’s behalf as an extension of credit to the principal. So, the main concern is credit risk—the possibility of loss from a borrower’s failure to repay a loan. That risk is measured by the principal’s personal credit score.  

A high credit score is reliable evidence of low credit risk, which deserves a low premium rate. A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.