As a representative of a contractor or a contractor yourself, you may have a ten thousand or ten million dollar project, but it’s still a vital deal to the growth and stability of your organization. Approved Surety has Bonding Capacity Enhancement Programs, to meet your specific needs, and we’ve got the specialists and financial strength to facilitate those needs.
Approved Surety’s team of surety specialists understand all aspects of the construction business such as contract terms, financing, succession planning, and any foreseeable owner and industry issues. When our clients need a consistent surety program, Approved Surety has what it takes to make it happen.
The following information is generally required by a surety when:
- Contractors Questionnaire
- details of upcoming contract that requires bonding (see Bond Requisition Tab)
- Latest Accountant Prepared Year-end Financial Statements
- Principal(s) Personal Net Worth Statement(s)
- Reference Letters for larger jobs performed
- Bank Reference Letter or line of credit term sheet.
- Work on Hand Report
The following guide explains and provides practical information on Construction Bonding including Tender bonds, Performance bonds, and Labour and Material bonds:
There are three primary types of Bid or Tender bonds including the Agreement to Bond, the Bid Bond, and the Pre-Qualification letters. These bonds are categorized under the aforementioned header because they are normally issued in the Tender stage of a contract.
- Bid Bonds
A Bid Bond is normally obtained by the contractor (Principal), during the process of placing a bid for a job contract. The Bid Bond is a guarantee that the principal will honour the terms of the contract, should they win the bid.
A bid bond is typically required in the amount of 5 to 20 percent of the contract bid, most commonly 10 percent.
In the event the contractor does not fulfill its obligations, they must compensate the owner (Obligee) for the difference between their bid and the next closest bid. In the event the contractor does not compensate the owner, the bonding company must pay out the difference under the bid bond. The bonding company, in turn, will seek compensation from the contractor.
- Agreement to Bond
An agreement to bond commits the surety to providing performance and payment bonds if the contractor is awarded the contract. An agreement to bond is often required at the tendering stage of a contract in conjunction with or as a substitute for a bid bond.
- Pre-Qualification Letter
A Pre-qualification letter is a letter written to the Obligee by the Surety that pre-qualifies the contractor for a certain size range of upcoming tenders. Surety companies make pre-qualification decisions by evaluating contractor’s financial condition, credit history, and experience.
A performance bond is a legally-written guarantee, in which the surety guarantees that the contractor or company, called the “Principal”, will fully perform the obligation to the Owner, or “Obligee” as stated in the contract.
A performance bond is the primary form of construction surety bond which may be required in support of any type of contract. The majority of performance bonds are issued on behalf of construction industry contractors in support of contracts they wish to enter into with various government related or institutional organizations. Various large commercial concerns and financial institutions may also require performance bonds.
While contracts requiring bonding are most commonly related to construction projects, performance bonds are frequently required in support of contracts for the supply of materials, services, labour and products of many kinds.
Performance bonds are most commonly issued in Canada and the U.S. by insurance companies who are specifically licensed for this purpose (known as Surety companies or Sureties).
LABOUR & MATERIAL PAYMENT BOND
This is a form of contract surety bond that is often required to accompany a performance bond. The labour and material payment bond guarantees your client’s customer (the “obligee” eg. a government body/Private company with whom they have executed a contract) that your client (the “principal” or contractor) will pay all amounts due to their sub-trades, labour and suppliers with respect to the contract in question. It should be noted that any payment by the surety creates an obligation by the principal to reimburse the surety for all expenditures.
A Maintenance Bond is a type of contract bond that guarantees the Principal will maintain the project and correct any defective workmanship after the project is complete. It is typically issued in conjunction or included in the wording of a performance bond. A maintenance bond is not technically insurance, though the bond basically functions as an insurance policy on a construction project to make sure a contractor will either correct any defects that arise or that the owner is compensated for those defects.