If you are bidding commercial non-residential work, eventually you will be required to provide a bond.
When someone wants you to bond back to them, they are referring to you providing to them a surety bond called a Performance and Payment Bond. The whole process of getting these is called Surety Bonding. This bond guarantees that you will finish the contract according to the specs of the contract, on time, and that all labor and materials will be paid so that no liens will appear later on from your work. The bond also guarantees your workmanship for one year.
Also, owners will require in the specs that their architects and engineers put out for bid, that your bid for the work that you plan to perform includes a Bid Bond. The Bid Bond is usually for 5% of the bid (20% for Government Bids) and guarantees that if you are low bidder, the bonding company will provide Performance and Payment Bonds for the amount of the contract. Should you pull out of the bid, the Bid Bond guarantees to replace costs to that owner to rebid the project up to that percent.
Other bonds that you run into are miscellaneous license and permit type of bonds required by municipalities and states.
A Bond is a corporate guarantee from a surety company which is usually a division of an insurance company like Travelers, or Liberty Mutual. In order to get that guarantee from them, you have to get an experienced agent to make a submission to them for you.
An experienced bond agent, works with you to present your needs to the surety company in a way that will make that surety company say yes for the bond or bonds that you require. Once approved, there is a premium rate charged based on a percentage of the awarded contract (usually 2.5% or less-The contract awarded to you is for $100,000, and the requirement is a 100% Performance and Payment Bond – $100,000 X 2.5% = $2,500 bond premium charge).
When you know a project will require you to provide a bond, you must add the cost into that project.
Surety Bond costs are almost always reimbursed in your first draw for mobilization and utilization expenses.
Stay tuned for our next blog in this series: How Bonds Help Your Business Grow.