Contractors Bonding Basics

Contractors that bid government jobs are required to obtain Bid/Performance Bonds through a licensed insurance agent. Let's look at what a bond is and why municipalities require a bond.

A surety bond is similar to a bank loan with the surety company acting like a bank. The surety company is agreeing to pay an agreed upon amount in the event of a claim (I will discuss later). If the municipality is requesting a $500,000 bid bond, the contractor has to prove to the surety company that the company can make good on that amount. This is where the surety company needs to qualify the contractor for the ability to repay the amount in the event of a claim. The contractor is responsible for paying back the surety company the claim amount. If a full claim is filed against the bond, the contractor is required to pay back the surety company. It acts like a line of credit for a specific event in exchange for a premium.

Contractors that have poor credit can experience difficulty in obtaining a bond just like obtaining a loan. Two options instead of obtaining a bond are self insuring or collateralizing. Self insuring is what it sounds like. The contractor puts puts up the full amount into an escrow account until the project is completed. Collateralizing is where the surety company requires a portion of the bond amount be remitted in the form of cash held in trust until the end of the project.

Why do municipalities require a bid bond? When a contractor enters into a bidding contract with a municipality, the contractor has stated to the municipality of their good faith intention to win the lowest bid for the project. The contractor maybe among several other contractors bidding for the same project. As required for government projects, the municipally has to allow several bids to compete, all of which are under contractual obligation to submit their best pricing. This can create a financial hardship for the municipality and all other bidding contractors if one or more of the contractors withdraw their intentions before the award is finalized. This creates a claim.

The municipality can then file a claim against the withdrawn contractors bond for any amount up to the full bond amount.

The need of the bond is cover any financial hardship realized by the municipality or any of the other bidding contractors.

Big Boy Toy Insurance has secured relationships with several of the nations best and largest bond issuers regardless of current credit standing. We have been successful in obtaining high risk bonds for a few of our local contractors with great turn around and service. For our low risk contractors, we are glad to have the ability to place those risks with either HCC Surety or CNS Surety. CNA is one of the industry's largest and best rated issuers offering highly competitive premiums for all classifications of contractors.

We also have the means to issue aggregate bond limits making future bond issue fast and painless.

Please contact us for more information or apply over the phone for your Surety Bond pre approval.