We have a guest blogger.

Kevin Kaiser is a principal with Surety Bonds.com. He graciously offered to share his insights about bonding with our community. We hope you find his series on bonds to be helpful. Without further ado, here’s Kevin’s introduction to contract bonds.

Contract Bonds

Contract Bonds, often called Construction Bonds, are common financing and risk-mitigation tools utilized across the country. They’re a part of construction projects big and small, from city libraries and sewer plants to residential structures and hospitals.

In all, there are seven major types of contract bonds — there isn’t a single “contract bond” that can be issued. These seven forms cover a host of needs and provide financial protection for project owners. In short, contract bonds are basically three-party agreements that guarantee a project’s completion and provide an avenue for financial compensation in the event of default or some other problem.

How do they work?
These three parties are the principal, who performs the work; the obligee, the receiver of the work; and the surety, the third party guaranteeing that contracts are followed. For example, contractors must obtain payment bonds on public works projects guaranteeing that workers and subcontracts get paid according to their contract. If the contractor fails to pay or defaults, the payment bond ensures workers get paid — and that the project owner, the obligee, is protected against any financial harm.

Contract bonds are required on all federal projects valued at $100,000 or more. But state and municipal agencies also typically require contract bonds for public works projects. Even private developers and enterprise may require these standard surety bonds.

How are they issued?
Insurance companies and standalone surety bond firms are the most common issuers of surety bonds. These operations employ strict underwriting procedures, as surety companies do not want to be on the hook if a company defaults halfway through a project. Contractors will engage in a formal application process, which typically includes information such as:
-Credit profile
-Business financial statements
-Resumes for managerial team
-Personal financial statements
-Personal credit profiles

What do they cost?
The cost of contract bonds varies, often depending on the individual applicant, project and surety. They typically cost anywhere from 1 to 15 percent of the contract amount. Rates fluctuate depending on the nature and complexity of the contract and the financial standing of the applicant. Applicants with less than stellar credit or financial profile may be able to secure bonding from high-risk issuers, but those rates will be higher.

What’s next?
Over the course of the next few weeks, we’ll provide a snapshot of each of the seven major contract bonds. Next time, we’ll discuss Bid Bonds.
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Kevin Kaiser is a principal with Surety Bonds.com, a nationwide surety bond agency. Please visit www.suretybonds.com to learn more about contract bonds or request a quote.

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