Construction Bonds

Many states require construction companies and general contractors to obtain a construction surety bond for licensing, project bids, and construction contracts over a specified amount.

Here is everything you need to know.

There are several types of construction bonds used to guarantee construction and quality workmanship—often required by the government for public jobs and public works. Additionally, private entities and general contractors bidding out projects to subcontractors can also require them.

You can use our contractor bond guide to learn about every bond you'll ever need for your contracting business. You can also take a look at our most frequently asked surety bond questions.

Why Are They Required?

Construction surety bonds protect project owners, suppliers, and laborers against financial loss. It is a legally binding agreement that you (a construction company or general contractor) will carry out a job lawfully, ethically, and as per the terms of the contract. If you fail to do so, the affected party can make a claim against the bond. The bond company that issued your bond pays for any valid claims initially. However, you're ultimately responsible for reimbursing all costs to the bond company.

Bid Bonds

Bid bonds get your foot in the door by allowing you to bid on bonded jobs. They guarantee your bid is accurate (so make sure it is!). They also guarantee that the bonding company will provide a performance & payment bond if you are awarded the contract.

Performance Bonds

Performance bonds are what guarantee your work to the project owner. The required "performance" of your work is outlined in writing in the contract. Note that higher contract amounts often require bigger bond amounts.

Payment Bonds

Payment bonds guarantee that you'll pay all subcontractors, laborers, and suppliers.

Maintenance Bonds

Maintenance bonds provide a warranty on your workmanship for a specific amount of time after the work is complete.

Supply Bonds

Supply bonds ensure suppliers deliver materials according to their contract.

• Check the job specifications to see if there are bond requirements (public projects usually have them).
• Obtain a bid bond from your bond agent and submit it with an accurate bid proposal.
• Provide your bond agent the bid results, whether you won or not (frees up your bond line).
• If awarded the project, request a performance bond as soon as possible from your bond agent. You can read our surety bond cost guide here.
• Complete the work in full (you are responsible for claims).
• Once the project is done, close out the job by telling your bond agent it is complete to free up your bond line.

A maintenance bond is occasionally required after you close out the job by whoever required the bid and performance bonds. If this is the case, file a bond application for a maintenance bond. Be sure to make any repairs and site improvements while your bond is active.

This comprehensive guide for small businesses and big companies alike explains everything you must know to bid on and win projects. The topics covered in this free e-book include:

• The pros and cons of bidding on public construction projects
• Bid solicitation procedures
• What influences the bid process
• How to bid on public projects
• Surety bonds for bidding and construction
• Why you need to understand bond claims

Bonding capacity (also referred to as your bond line) is the pre-approved dollar amount of contract bonds that you qualify for.

Your single limit is the largest bond you can get for a single job. Your aggregate limit is the total amount of bonded work on hand you can have at once for several projects. Learn how choosing the wrong construction bonding company can limit your bond lines.

Remember, active jobs count against your bond line—whether you are awarded projects or not—making it important to tell your bond agent the results of every job you bid on.

A Simple Bond Line Example

Let's imagine you have a $500,000 over $1,000,000 bond line.

The $500,000 single limit would allow you to work on jobs no larger than $500,000. Your $1,000,000 aggregate limit would allow you to work on two jobs of $500,000, four jobs of $250,000, eight jobs of $125,000, etc. at the same time.

Strong Financials Will Increase Your Bond Limits

When a surety company or any other lender is considering writing a performance bond, your financial statements will be reviewed. This is a key part of the underwriting process to help them determine how you handle your obligations and whether you can handle projects that come along with a larger bond limit.

Your financial statements must show sufficient working capital, cash flow, equity, and profit for a surety company to increase your bond limits.

When providing your financial statements to a surety company, it's highly recommended that you work with a construction CPA. They know the industry inside and out and will be able to present your company appropriately when attempting to increase your bond limits.

Build Strong Foundations with Smaller Construction Bonds and Jobs

When you get construction bonds such as bid and performance bonds for a public job, you are responsible for the project's completion. If you don't complete the job according to the contract, a claim can be filed on your bond—which you're ultimately responsible for paying. Therefore, you should avoid getting in over your head by bidding on larger projects that you're not yet qualified to work on. Thankfully, the bonding process often helps ensure this.

If you are a contractor with a new business, the surety company will likely limit you to bonds for only smaller contracts (about $350K and under). The bond limit is for your own protection since your company doesn't have a proven track record of completing larger projects. It additionally benefits you since you don't have to obtain CPA-prepared financials for smaller jobs—which often cost thousands to have prepared.

Start with smaller jobs to gain the proper experience and allow yourself to get familiar with the entire process, from bidding on jobs to completing projects. This will also give you time to develop a strong relationship with the surety company.

Strengthen Your Experience and Surety Relationship, Get Bigger Bonds

Once you have the proper experience, a track record of completed projects, and have built up your relationship with the surety company, you can start bidding on larger projects (about $350K+). Your relationship with the surety company is important because when they provide you bonds for public construction jobs, they are extending a form of credit to you.

As mentioned above, the bonds guarantee you'll complete the project according to the contract. If you default or perform faulty work and cause claims, the surety company will pay them at first. However, they will come back for you for reimbursement. Building a strong relationship with the surety company is vital to both your company's and the surety's success.

Working on bigger jobs usually increases your company's overall profit, which makes getting the CPA-prepared business financials that are required for larger bonds less of an issue as it often is for smaller or new contractors.

Contractor license bonds are required by most states for contractors to get their license. These bonds guarantee you'll pay any claims in full that you may cause by not operating your contracting business professionally. If you'd like to learn more about what surety bonds are and how they work, you can read our detailed guide here.

Subdivision bonds allow developers to make improvements on public property such as roads, sewers, and sidewalks. They guarantee the improvements will be done properly.

The local government will tell you if a bond is needed to perform improvements or additions after you present your site-improvement plans.

Surety bonds for construction jobs protect the public and are used for public projects. However, most surety companies in the U.S. won't provide construction surety bonds for certain lines of work. Why? Because the majority of U.S. surety companies consider certain projects too risky to bond. Some examples include:

Overseas Projects & Jobs on Indian Reservations

With projects overseas and Indian reservation construction jobs, most U.S. surety companies will not consider writing surety bonds to guarantee their completion because the laws differ from state and Federal laws.

Since the surety company is first on the hook to pay bond claims, they don't want to take the chance of providing surety bonds in a region where they're unfamiliar with the law and risk non-payment of claims.

Multi-Year Construction Jobs (3+ years)

Multi-year construction contracts that last for three or more years are too risky for surety companies. They can't determine whether a contractor will still qualify to perform the work that far down the road.

For instance, if a contractor defaults on another project while also working on a three-year job, it could cause them to go bankrupt.This would mean the contractor wouldn't be able to finish any other jobs they were working on.

Private Home Remodeling Projects (Unless Government Funded)

Getting construction bonds for private home remodeling projects will be impossible. Not because they're too risky for surety companies, but as a result of being private jobs. As mentioned above, surety bonds for construction jobs protect the public and are used for public projects.

It's possible to get surety bonds for private home remodeling jobs that are being paid for by the government, e.g. the government stepping in and paying for projects in a particular state where a hurricane caused significant damage to homes.

Additional Information

Performance bonds for public construction projects guarantee your performance on the project. This differs them from financial guarantee bonds that ensure things such as building leases or sales tax revenue are paid.

If bonds for construction projects simply guaranteed that payments would be made, more surety companies may consider writing bonds for the types of work mentioned above. However, the risk is far greater.

Our company has bonded thousands of construction projects over the years. You can take a look at some of our most notable bonded projects here.

There are several types of insurance coverages that are recommended for contractors, but the recommended coverage will vary based on your operation.

If you’d like to learn more about all of the insurance coverages available to you, please read our contractor insurance guide.