Going into business for yourself, involves a great deal of time, energy and risk. In the Construction field, it’s not just you as the business owner that faces risk, your customers also assume some degree of risk when hiring you. A contractor surety bond helps protect the project owner, the contractor, and helps give your customers peace of mind.
What is a Contractor Surety Bond and How Does It Work?
A surety bond is basically a promise that one party becomes legally liable for the debt, default or failure of another party. Contract surety bonds are agreements between three parties:
- One party called the Surety (bonding company or bank) guarantees a;
- Second party called the Obligee (usually the project owner or contractor) the completion of a contract by a;
- Third party called the Principal (usually the contractor) (1)
In other words, as the contractor, you pay a fee to have a bonding company guarantee your contract with the project owner. If you fail to complete the contracted project, the bonding company finds another contractor to complete it, or pays the project owner a pre-set amount. The surety bond gives the project owner reassurance at the start of a project, that it will be completed. If the bonding company has to pay the project owner it will trigger an indemnity agreement, whereby you as the contractor are obligated to reimburse the bonding company for their losses.
Types of Surety Bonds
There are three different types of surety bonds and each type has a different purpose:
- Bid Bond – A pre-contract bond that ensures that the lowest bidding contractor on a construction bid will enter into the contract if the bid is accepted, and the will furnish whatever additional bonds are required. These bonds help to ensure the legitimacy of bidders and serve the purpose of pre-qualification of the selected contractor.
- Performance Bond – Guarantees that the contractor will complete the project as outlined in the contract. These bonds protect the owner if the contractor is unable to fulfill the obligation.
- Payment Bond – Ensures that the all laborers, sub-contractors and suppliers will be paid by the contractor, subject to restrictions and limitations imposed by statute, the contract or the bond.
There are other bonds that can be required in the context of construction, but these are the three essential types.
As a Massachusetts Contractor Do I Need a Surety Bond?
Public Construction Projects:
Bonds such as performance and bid bonds are required to work on public construction projects. These requirements are usually set by the individual cities or municipalities rather than the state of Massachusetts.(2)
Federal Construction Projects:
“As a law, the Miller Act (40 U.S. Code § 3131-3134) requires contract surety bonds on all federal construction projects.” (3) Prime contractors bidding on a federal project must post a performance bond and a payment bond covering all labor and material. The law is required on contracts exceeding $100,000 working or planning to work on any building or property of the United States.
Every state has its own version of the Miller Act, called a “Little Miller Act”. Massachusetts (M.G. L. c. 149, §29) requires that bonds be provided on any contract exceeding $25,000 for alteration, repair, remodeling, demolition or construction of facilities.
Private Construction Contracts:
Many private owners choose to require contract surety bonds on their projects to protect their investment and to ensure the contractor is qualified to perform the work. Prime contractors will often require their subcontractors to obtain performance and payment bonds as well. In some cases, lenders require owners to obtain bonds on projects.
How Much Does A Massachusetts Surety Bond Cost?
Surety bond premiums vary depending on the bond amount needed and your rate (which is the percentage of the full bond amount you must pay). Premiums can range from 0.5% – 4% of the contract amount, depending on the size, type, and duration of the project and the contractor.
For a small and emerging contractor with minimal experience, a contractor can expect to pay 2-4% of the contract price. Working similar to a bank loan, personal credit influences the rate provided by the surety company. The surety company is ensuring you will perform the duties of the contract and is financially backing you.
How to Get the Best Rate for a Surety Bond
Securing the best bond rate involves factors that reassure the surety company you have a history of success and won’t need to use the bond, such as your financial background and the experience of your business. You represent a higher risk to the surety company if you have a shaky financial background and/or limited business experience. (4)
Below are some of the best ways to ensure you are getting the best rate for contractor surety bonds:
- Providing industry experience, strong personal credit along with business and personal financials will help lower your bond rate.
- Having a great Certified Public Accountant (CPA). For contract bonds, larger contractors with poor credit may obtain approval with strong CPA prepared business financials.
- The bond size and your likelihood of causing bond claims are used to calculate premium. Bond companies determine your odds of causing claims by looking at your line of work, personal credit and industry experience.
Why Use McSweeney & Ricci For All Your Massachusetts Business Bonding Needs?
- We Partner With Your Business: Many small contractors face difficulty securing their first bonds or establishing enough bond support, to handle their growing business plans. Our commercial insurance team has experience with the variety of bonds you may need, and can develop a surety program for any situation. We partner with you to walk you through the steps of securing a bond or bond line. We will advise you on the specific issues, and necessary documents such as financial statements, tax returns, lines of credit, and contract details, required to obtain a bond. These items help establish the bond relationship between the contractor, agent and the surety provider. (Contractors who are active bidders should partner with an insurance agent that specializes in surety, to provide more frequent professional assistance on their bid and performance bonds.)
- Expertise You Can Trust: Since 1964, McSweeney & Ricci has helped businesses of all sizes throughout Massachusetts, New England and beyond. We specialize in providing General Contractors and Specialty Contractors with complete business insurance solutions, safety materials and advice to help minimize risk, and white glove claims service to get you back to work quickly, if you do experience a loss.
- We Represent Numerous Leading Surety Companies: McSweeney & Ricci Insurance represents more leading insurance carriers than most agencies our size. In addition, we represent many of the leading surety companies and surety wholesalers in the industry. These excellent working relationships and partnerships, allow us to select the best program for your individual needs as well as the best options for your business.
- We’re Active in Your Industry: Our commercial team stays informed of any changes that occur within the construction industry throughout Massachusetts and New England, and will alert you as to any changes affecting you and your day-to-day operations.
For more information on securing a contractor surety bond, such as a bid bond, performance or payment bond or other various surety bonds such as a fidelity bond, contact Kyle Carrigan. With over ten years of industry experience, Kyle specializes in contractors and has earned the Chartered Property Casualty Underwriter (CPCU) and Associate in Fidelity and Surety Bonding (AFSB) designations.
Contact Kyle at (D) 781.952.4132 (C) 617.281.9177 or submit for a complimentary quote on our website.
Author: Kyle Carrigan, CPCU
Commercial Lines Sales Executive | LinkedIn Profile
