7 Surety and Performance Bond Questions We Get Asked By Contractors
Here are the 7 surety and performance bond questions our bond experts always get asked by contractors. We consolidated this list to keep you informed and confident throughout your bond acquisition process.
1. Where do I go to get a surety or performance bond?
Step one in the surety bond acquisition process is to initiate a relationship with a professional bond broker. Contract bond brokers specialize in providing surety bonds to contractors, subcontractors, and others. Their primary activity is positioning their clients to qualify for surety credit, which will enable you, the contractor, to obtain a bond. They also provide invaluable advice and expertise to aid you in the surety company credit process, and aim to cultivate a relationship of trust, respect, and teamwork with their contractors.
Searching for a bond broker? Our expert brokers would be happy to partner with you to help with all of your bonding needs.Let’s connect!
2. What bonds must I get as a construction company trying to bid on a project?
It is imperative that you acquire a bid bond during the bidding process for a project. Bid bonds are critical to the bidding process because they relieve owners of the financial insecurity, inefficiencies, and frustrations that would otherwise arise in the process.
Bid bonds guarantee that you, the contractor, have submitted your bid in good faith and will enter into a contract with the owner if chosen. These bonds are typically valued at 10% of the tender offer. If you are the winning bidder but do not honour your bid, the owner can claim up to 10% of the bid price for any damages they suffer.
If awarded the contract, the next bond you would need to get is a performance bond, which guarantees you will fulfill the obligations set out in your project contract with the owner. We discuss the ins and outs of performance bonds in this article: About Performance Bonds.
3. What is an indemnity agreement?
An indemnity agreement is required by all bond facilities when applying for a bond. It is a contract between a contractor and a bond company which requires the indemnitor (the contractor) to guarantee the bond company full recuperation of any possible losses or expenses the bond company could suffer from of bond issuance.
For example, if the bond company issues a bond on behalf of the principal (the contractor) and the contractor fails to fulfill its work obligation for a project, the contractor is legally required by the bond to pay the bond company for the losses it suffered. Remember: the underlying concept of suretyship is that the bond company will not sustain a loss, as the principal is expected to fulfill its contractual obligations to the project owner.
Before you sign an indemnity agreement, be sure to review and understand the contract to confirm that it is suitable to your business and there are no provisions that are too risky. We understand that this process can be confusing. If you have questions, we encourage you to reach out to us by email or phone – we’re happy to help!
4. How much does a bid bond cost?
The cost of a bid bond is covered by the annual administration fee you pay to maintain your bond facility. A bond facility allows you to bid on bonded projects within your bond limits. The annual administration fee is charged once per year by your bonding company, and covers the cost of all your bid bonds. That means if you bid one time or one hundred times per year, your fee remains the same.
The standard fee is typically $2,500 with additional fees charged if you are awarded a contract and performance and labour and material bonds are required. Surety and Performance Bond Cost elaborates on the cost of bid bonds and the uses and costs of other surety bonds throughout the bonding process.
5. How do I plan for my first meeting with a surety bond broker?
You’ve connected with a bond broker and you want your first meeting to go well. Be prepared for your broker to request many different documents, statements, financials, and reports, and do your best to bring as much of the information requested as you can.
Your broker will understand if you do not have everything he or she asked for, and will help you devise a strategy for obtaining the final pieces. What’s important in this meeting is to demonstrate you are organizationally capable and financially sound. At minimum, bring the contractor’s questionnaire and financial statement.
Ready to get started? Call us today!
6. What factors does a surety bond company consider in the underwriting and pre-qualification process?
Getting a bond is more similar to obtaining bank credit than buying insurance. Most bond companies will evaluate the following factors during the underwriting process:
- Financial capacity
- Tangible net worth
- Cash flow
- Credit Score
- Work in progress
- Work history, expertise, experience
- Banking relationship
- Nature of project to be bonded
- Character of the contractor
This list may seem intimidating right now, but once you begin collecting the information and working with your surety broker, you’ll be comfortable in no time.
7. Are bonds required on public projects, private projects, or both?
According to recent legislation coming into effect on July 1, 2018, surety bonding will be mandatory for all public construction projects in Ontario, using new performance and broad form labour and material bond forms. Bill 142: Mandatory Surety Bonds for Public Projects in Ontario explains the implications of Bill 142 in greater detail, ensuring you are up-to-date on the most relevant industry information.
As for the private sector, bonds are not currently required. However, private owners may opt to require surety bonds on their projects because of the value it provides to the project stakeholders as it provides incentive for all parties to fulfill the project obligations.
Choosing a broker can seem like an arduous task, but at FCA, we make it easy. Get in touch with us today and you’ll be well on your way to surety bond success with bonds tailored exactly to your business.