Texas 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 Texas construction bond needs.

What Are They?

Federal legislation commonly referred to as the Miller Act requires contractors to purchase certain construction bonds as a prerequisite for bidding on or being awarded taxpayer-funded projects valued above $100,000. Texas, like many states, has its own version of this legislation, informally called its “Little Miller Act,” that applies to state-funded projects valued above a certain amount.

The three main types of Texas construction bonds are bid bonds, performance bonds, and payment bonds. Each serves a different purpose, but they all provide financial protection for state and local government “project owners.” Specifically, they do the following:

  • Bid bonds provides a level of assurance to the project owner that the bidder will likely be able to obtain two other important construction bonds if awarded the project—performance bonds and payment bonds. A bid bond also ensures that the bidder is serious about accepting the contract if selected as the winning bidder.
  • Performance bonds are a contractor’s guarantee to complete the project according to contractual requirements. It provides funds for the project owner to pay the cost to remediate substandard work or to finish the project if the contractor defaults.
  • Payment bonds guarantee that the contractor will pay all subcontractors, laborers, and suppliers as specified in the contract. They also provide funds for paying them if the contractor fails to do so, hopefully avoiding liens being placed on the property due to nonpayment.

Increasingly, private project owners are requiring contractors to purchase the same types of contractor bonds.

Who Needs Them?

Under the Texas Little Miller Act, a contractor must obtain a payment bond for public works projects valued over $25,000. If a project is valued in excess of $100,000, the contractor must purchase a performance bond as well. Below are some more bonds you may need:

  • Contractor License Bonds: Ensuring that contractors are properly licensed.
  • Bid Bonds: Guaranteeing the accuracy of a contractor's bid.
  • Performance Bonds: Ensuring the completion of the project as per the contract.
  • Payment Bonds: Guaranteeing payments to subcontractors and suppliers.
  • Maintenance Bonds: Ensuring the quality and maintenance of completed work.
  • Subdivision Improvement Bonds: Covering costs related to subdivision development.

Depending on the specific project type and location, additional bonds like right-of-way bonds or solar decommissioning bonds may also be require

How Do They Work?

There are three parties to every Texas construction bond:

  • The project owner requiring the bond is the “obligee.”
  • The contractor purchasing the bond is the “principal.”
  • The surety company underwriting and approving the bond is the “surety.”

When the surety issues a construction bond, it establishes a credit line for the principal in the required bond amount to serve as the source of funds for paying claims against the bond. If the principal commits a contractual infraction that causes the obligee a financial loss, the obligee can file a claim against the construction bond, although the surety will attempt to negotiate a settlement if possible. When such negotiations are unsuccessful, the surety will pay the claim on behalf of the principal by tapping into the principal’s line of credit.

This extension of credit creates a debt that the principal is legally obligated to repay to the surety. The surety bears no legal responsibility for paying claims.

What Do They Cost?

The premium cost for any type of Texas construction bond is a small percentage of the required bond amount mandated by the obligee. The surety determines that premium rate based on how risky it is to extend credit to the principal.

The surety’s risk assessment takes into account the contractor’s business financials, personal and business credit score, industry experience, and the likelihood of a claim against the bond. The most creditworthy contractors will pay the lowest premium rate, typically in the range of 1% to 3%. While it may be possible for credit-challenged contractors to get bonded, they may pay a higher premium rate.

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