Commercial clients and most governmental agencies require contractors to be bonded to both bid on a job and complete the work. A bid bond is submitted at the time of bid. It states the contractor has financial assurance from a bonding company that the bid has been submitted in good faith and will be contracted at the bid price.
After the job has been accepted, a contractor needs to provide a performance bond, which is a guarantee by the bonding company that the contractor will perform the work in accordance with the terms of the contract.
Contractors may also be required to provide a payment bond, which is a guarantee that the contractor will pay suppliers and subs. If he does not, the bonding company pays to complete the job and then extracts payment from the contractor's assets.
For this reason, insurers carefully research contractors and establish a relationship with them before providing bonds. “Typically a bonding company only wants to deal with contractors that are profitable every year. If a contractor has a good record, and good personal assets, they might lose some money, but if the bank supports them and they have equity, the bonding company will go forward, hoping the contractor regains profitable status,” says Phil Krug, vice president of Insurors & Investors in Salina, Kan. He adds that most bonding companies refuse to work with a contractor that has several insurers for its jobs. “They want it to be exclusive and to be able to keep track of their finances,” Krug says.
To set up bonding, Krug says, most insurers ask contractors to bring in a financial statement, a recent balance sheet, a profit & loss statement, and a personal financial statement. The company will also note other important aspects of the company, including years in business, the type of company, and credit information.
The surety rate differs from state to state. For performance and payment bonds in Kansas, the standard surety rate is 2.5% for the first $500,000. “If you are high risk, you can get bond if you have assets, but then the rate would be 3.5% to 4%,” Krug notes.