Surety bonds are frequently used in the construction industry. In order to obtain a contract, the contractor or subcontractor must provide the obligee (project owner or general contractor) a bond for its performance of the terms as per the contract. Additionally, owners and contractors may also require payment bonds to ensure that subcontractors and suppliers are paid for work done. Under the Miller Act of 1935, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.
The principal (contractor or subcontractor) will pay a premium, annually in advance, in exchange for the surety company’s financial backing to extend surety credit. In the event of a claim, the surety will investigate the claim prior to payment. If it turns out to be a valid claim, the surety will arrange for the project completion and pay any outstanding liens under the payment bond. The surety will then turn to the principal for reimbursement of the costs incurred to complete the project, any payments against made to release liens on the project, as well as any legal fees incurred in the process.
Bid Bonds, Performance Bonds and Payment Bonds are underwritten very closely, with a number of factors included in the process. Preparation for this process is of paramount importance and takes the collaborative efforts of a number of professionals familiar with the contract surety process. For further information or to initiate the process, please contact us.
Establishing Bonding Capacity
The first step toward establishing a bond program is to contact a professional surety bond organization, such a IMC Surety Solutions, that:
- Understands the intricate process of surety bonding and the unique underwriting standards and practices of the surety industry and the companies they represent
- Matches the needs of the contractor with the surety company that is best suited to service those needs
- Guides the contractor through the bonding process and assists in managing the contractor’s surety capacity
- Creates and nurtures a successful relationship between the contractor and the surety company
- Provides introduction to qualified accountants, bankers and attorneys who understand the construction business
- Is knowledgeable about the construction industry, accounting and finance procedures and strategic planning and management practices, and
- Offers sound business advice, management consulting and technical expertise to help the contractor maintain growth and profitability.