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All About Construction Bonds
You’re a professional insurance agent, ready for anything when it comes to your clients’ needs. Well, almost anything — when it comes to specialized insurance products like construction bonds, you might need a little professional help. That’s why BondExchange has you covered. Here’s what you might need to know about construction bonds, when and why your clients need them, and anything else necessary to keep your clients protected.
What is a Construction Bond?
First things first: the definition of a construction bond. Construction bonds, also known as contract bonds or performance bonds, are a subset of surety bonds that protect project owners from financial loss if the contractor fails to complete the work or meet other contract obligations. Construction bonds are mandated by law for most public works projects and may also be needed for private commercial contracts.
How Does a Construction Bond Work?
Construction bonds work by providing assurances to project owners that the construction company has the ability to perform their job to the specifications of the contract. For the most part, construction bonds involve three parties, which include the project owner or investor, the construction company or companies involved in the building of the project, and the insurance provider that underwrites the construction bond.
Typically, the project owner, known as the obligee, is a government agency that wants to reduce risk of financial loss. The obligee makes it a requirement for any builder to put up a surety bond before even bidding on the contract, also known as a bid bond. The contractor that is awarded the job then must post a performance and/or payment bond.
Different Types of Construction Bonds
Construction bonds are an integral step in any public works project, but they are not one-size-fits all. There are different types of construction bonds. In fact, there are three primary types: bid bonds, performance bonds, and payment bonds. All of these are surety bonds, but they all serve different purposes when it comes to protecting the obligee from financial responsibilities in the event the principal finds they cannot complete the project to the terms laid out in the contract.
What is a Bid Bond in Construction?
The purpose of a bid bond in construction is straightforward. The bond is put in place to ensure a contractor bidding on a project will be able to produce a performance bond if the job is awarded to the contractor. As for how a bid bond works in practice – bid bonds are filed with the project owner along with the contractor’s bid packet. If the contractor is selected (usually because they are the lowest bidder) and awarded the contract, at that point, bid bonds are usually returned to the contractor and replaced with a different construction bond: a performance bond.
What is a Performance Bond in Construction?
Bid bonds are the first step when it comes to construction bonds, and they’re used to ensure the project owner is only accepting qualified bids. Performance bonds, meanwhile, do what you might think by the name: they ensure that the project will be performed in accordance with the contract. As a result, a performance bond is a guarantee that a contractor will not default on the construction contract and that all work will be performed properly. The bonds work hand-in-hand to ensure a project owner is covered from the bid bond process to the completion of the work.
What is a Payment Bond on a Construction Project?
For most contracts, in addition to a performance bond, the project owner will often request a payment bond. Payment bonds guarantee that the contractor will pay the material suppliers, workers, and subcontractors. The bond protects the project owner from payment claims and liens.
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How Much Does a Construction Bond Cost?
Construction bonds are a cost of doing business for contractors performing work for government agencies. The cost of any one construction bond, however, isn’t set in stone. Typically, the price for a bond is based on the the size of the contract and the contractor’s financial stability and experience.
Bid bonds do not carry a cost to the contractor, but if awarded the project, the contractor will need to pay between 1-3% of the total contract price for the performance bond. As payment bonds are almost always included with a performance bond, there is no additional charge for the payment bond. For contractors with established surety credit, rates are usually calculated on a tiered rate scale. The most common tiered rate, known as a 25/15/10 rate is translated to mean: 2.5% of the first $100,000 of the bond amount, 1.5% for the next $400,000, and 1.0% for the rest.
Example: $2,000,000 Contract Bond Cost Calculation
|Bond Amount||Premium Rate||Bond Cost|
Total cost of $23,500
How to Get a Construction Bond
Construction bonds, like other surety bonds, are obtained through insurance companies and their agents that specialize in providing surety bond insurance. Agents approach construction bond companies and source quotes on behalf of their construction clients before presenting them to their clients for review. BondExchange represents over 30 different surety companies to provide bid bonds, performance bonds, and payment bonds for almost any type of construction contract or customer credit profile.
The process of sourcing a construction bond can be challenging for insurance agents that don’t specialize in surety. Understanding how these bonds work and the underwriting process enables agents to provide valuable guidance to their construction clients, but it is also beneficial for agents to find skilled partners in sourcing a bid bond, performance bond, or any other construction bond.
Why Partner with BondExchange for Construction Bonds?
BondExchange has been working with insurance agents for over 40 years, building functional and fast technologies and specialty programs designed to make our agents work more efficiently. We know that most insurance agents do not focus on surety bonds such as construction bonds, so we’ve created a platform that makes the process simple, fast, and profitable.
Simplifying the Bond Process with the Help of Straightforward Tools
Thanks to the straightforward tools we’ve designed, BondExchange has simplified the construction bond process. Agents find it easy to quote bonds quickly, deliver those quotes electronically, and issue bonds online. Our online application uses language that’s easy to understand for both agents and their end customers. Our system generates quotes instantly after taking just seconds to shop over 30 markets, offering online bond purchases with zero paperwork.
You Deserve Customized, Expert Service
Our agents always come first here at BondExchange. Your name and brand is featured prominently, reinforcing your expertise and professional image with your clients at all times. With our professional underwriting staff, you’re always just a step away from the answers you need, whether it’s by phone, our website chat, or email. Our friendly, knowledgeable experts stand ready to help you through the bonding process.
Single Entry-Point Solution for Insurance Agents
BondExchange keeps it simple when it comes to providing access to hundreds of different types of bonds and rates from more than 30 different carriers. We offer a single entry-point to shop the entire surety market instantly online, putting your profitability and professional reputation first.