5 Things You Need to Know About Construction Bonds
The process of obtaining contract bonds for the first time can be confusing, while mistakes or misunderstandings can lead to serious problems. That’s why it’s vital to ensure you and your contracting firm have a solid grasp of all of the ins and outs of the process before you get started.
Plus, even if you’ve been working in construction contracting for a while, brushing up on the details of the process is always helpful. There are plenty of things you can do to reduce your bond rates and increase your bond line, and you can learn about them below.
1. Bad Credit May Prevent You from Getting a Construction Contractor Bond
Your personal credit plays an important role in determining your rate and whether or not you can be bonded at all. This is particularly true for smaller projects ($350,000 and under), where your eligibility and rate will be based solely on your personal credit.
For larger projects, while your personal credit is still important, your company’s overall financial situation and industry experience will play a more important role. So, better credit always helps, but owning a well-run and experienced contracting firm will allow you to reliably get bonded on big projects.
2. Construction Bonds Are Required for Most Large Projects
So when exactly do you need to get these bonds? The Miller Act requires them for all public contracts over $100,000. For private construction contracts, it’s really up to the organization offering the contract to decide whether or not they’ll require a bond.
In any case, however, not being able to get bonded when necessary is going to limit your options for the kind of work you can do. That’s just bad for business. But beyond simply understanding when bonds may be required, it’s also important to understand the various types of construction bonds.
3. There Are Many Types of Construction Bonds
Here’s a quick overview to help you make sense of all the different bonds for construction:
• Bid Bonds: These are required in order to bid on a project. They ensure that your bid is accurate and that your firm will take up the project if the bid is accepted.
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• Payment Bonds: This bond is designed to ensure that all of your laborers and subcontractors are paid.
• Performance Bonds: These ensure a project will be completed within the limits of the contract signed after a bid has been accepted. They will often be coupled with other bonds, such as payment bonds for example.
• Supply Bonds: This bond is a bit different in that it ensures you will provide the materials you have agreed to supply. It’s up to the job owner whether or not this bond will be required.
• Others: Beyond these basic types, there are some less common construction bond types like subdivision, maintenance, and site improvement bonds. These are usually connected to specific types of projects like housing subdivisions, or maintaining a project once it’s been completed.
4. Understanding How Bond Pricing Works Is Key to Saving Money
With so many possible bond types to contend with, understanding how pricing is calculated can create compound savings. The most basic element here is your personal credit score. As mentioned, if it’s below 650 you’re likely not going to be able to get bonded for smaller jobs.
Once your score is above 650, the higher it is, the lower your premiums are going to be. So improving your personal credit is one important way to save in the long run.
Still, boosting your credit isn’t always easy. Luckily, you can also lower your premiums by proving past experience. The longer you’ve been in construction contracting, the more trustworthy you are in the eyes of bond providers. That translates into lower costs for you.
5. Don’t Forget Your Bond Line
Aside from the various types of construction bonds, you can’t neglect taking your bond line into account, which is determined by the surety company. There are two limits you need to be aware of. The first is your single bid limit, meaning the limit on the contract amount of a single project. The next is your aggregate limit, referring to the total dollar amount of projects you can work on at any one time.
Neglecting to review your bond limits can lead to your business running into a serious roadblock when trying to take on new projects. So, it’s important to monitor your contracts and work with your bonding agency to increase your bond line. Higher limits mean more flexibility and the possibility for more work.
Bringing It All Together
All-in-all, the first step to getting the best premiums, the highest bonding limits, and ensuring you’re getting all the bonds you need is understanding the ins and outs of bonding. So study up, make a plan, and you’ll be able to bid on the construction projects you want.
What have been your experiences with construction contractor bonds? What has helped your business lower its premiums and increase its bond limits? Share your stories and tips in the comments.