Hearing the words “performance and payment bonds required” can put many contractors on edge—especially if they’ve never delved into the bonding process. The good news is, obtaining these surety bonds doesn’t have to be intimidating if you understand how they work and how to prepare.
What are performance, payment, and bid bonds?
- Performance Bonds: Assure the project owner that the contractor will complete the project on time and according to quality standards. In the event of a contractor’s default, the surety will ensure the completion of the contract.
- Payment Bonds: Guarantees that subcontractors, laborers, and suppliers will be paid for the work and materials they provide on the project. Payment bonds protect the project owner from potential liens and claims against the property
- Bid Bonds: Provides financial protection to the project owner in case a bidder is awarded a contract but fails to sign the contract or provide the necessary performance and payment bonds. Bid bonds are provided at no cost.
Together, these bonds protect project owners, subcontractors, and suppliers by keeping funds flowing and ensuring the work will be carried out properly.
Surety Bonds vs. Insurance
Although surety bonds are usually purchased through insurance agencies, they differ from standard insurance. With insurance, the carrier absorbs most of a valid claim’s cost. Surety bonds, however, function more like credit—if the surety pays a claim, the contractor is responsible for reimbursing that amount. Because of this, sureties screen contractors carefully, looking at their track record and finances before issuing a bond.
The “Three Cs” of Bonding
Sureties often evaluate contractors based on three key metrics:
- Character: Past project performance, reliability, and overall reputation.
- Capacity: The contractor’s technical ability, resources, and expertise to handle the project.
- Capital: Financial stability, cash flow, and creditworthiness.
A bond can be seen as a form of financial partnership. The more stable your business looks on paper, the more likely you are to secure favorable bonding terms.
How to Prepare for Bond Approval
Because sureties take a detailed look at financial statements, job history, and internal processes, good record-keeping and early relationships with bonding professionals are essential. If you’re eyeing larger jobs in the future, start getting your finances in order now—this might mean upgrading from a simple compilation of your books to a full audit, depending on project size and surety requirements.
Staying on Top of Bonding During the Project
Even after bonding is approved, disputes can arise—such as unpaid change orders, conflicts with subcontractors, or delays. It’s helpful to have an internal escalation clause requiring higher-level management to step in if disputes get heated. Keeping the contractor out of default is usually the cheapest and fastest route for everyone involved.
What if a Claim Happens?
Sureties don’t typically hand out checks the moment a payment or performance bond claim is filed. Claims often go through litigation or dispute resolution first. If a valid claim remains unresolved and the contractor can’t cover the costs, the surety pays—then seeks reimbursement from the contractor.
Tips for First-Time Bond Seekers
If you’re new to bonding, consult with experienced advisors—whether that’s a surety professional, CPA, attorney, or banker who’s familiar with the construction industry. They can guide you on improving financials, building a track record, and navigating contract requirements to bolster your bonding capability.
In short, surety bonds can open doors to higher-value public and private work. As long as you keep solid financials, prove reliability, and maintain clear communication, you can turn those “bond required” project specs into a growth opportunity for your business.