Construction Bonds for State and Municipal Projects
Construction bonds are often required for state and municipal projects, although the specific requirements can vary depending on the jurisdiction and the nature of the project. With over 75 years of experience and access to a broad range of surety markets, our expert agents are ready to assist with all of your state and municipal construction bond needs.
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Learn more about state and municipal construction bonds, or contact our experienced surety agents for assistance with any questions you may have.
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.
- 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.
- Maintenance Bond
- Subdivision Bond
- Solar Installation Decommissioning Bond
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%.
How Do I Get a Bond for State or Municipal Projects?
If you’re applying for a construction bond, such as a performance bond, that is tied to a specific state or municipal project, you may have to submit some documentation with your bond application. But it’s easy to apply with Surety Bond Professionals using our online application.