What Are Construction Bonds?
Construction bonds guarantee project completion and quality workmanship. They are often required for public works and private projects involving subcontractors.
Why Are They Required?
These bonds protect project owners, suppliers, and laborers from financial loss. They ensure contractors fulfill their obligations lawfully and ethically. If a contractor defaults, the bond company covers valid claims but requires reimbursement from the contractor. For more information on how these bonds work, visit the Alpha Surety Bonds website.
There are many types of construction bonds.
Bid Bonds
Bid bonds are a way of knocking on the door of bonded jobs. They guarantee the correctness of your bid (and so make certain it is!). They guarantee that if you are awarded the contract, the bonding company will issue a performance & payment bond.
Performance Bonds
Performance bonds guarantee your work before the project owner. The required “performance” of your work is outlined in writing by the contract. Be sure to take note that the greater the amounts in question are, the higher the bond amounts often required.
Payment Bonds
Payment bonds guarantee your payment to all subcontractors, laborers, and suppliers.
Maintenance Bonds
Maintenance bonds guarantee your workmanship for a certain time warranty after work has been performed.
Supply Bonds
Supply bonds guarantee delivery of materials by suppliers as per their contract.
How Do Construction Bonds Work?
Check the specifications of the job to see whether or not there are bond requirements (most likely in public projects). Obtain a bid bond from your bond agent and submit it along with an accurate bid proposal. Notify your bond agent of the results of your bid, regardless of whether you were successful or not (this frees your bond line).
If awarded the project, request a performance bond from your bond agent as soon as possible. Here is why you might want to read on: check our surety bond cost guide.
Complete the work as specified (you are liable for claims).
After completing the project, release your job to your bond agent so he can free up your bond line.Occasionally, a maintenance bond will be required after the job is closed out by whoever required the bid and performance bonds. If so, fill out a bond application for a maintenance bond. Be sure to make any repairs and site improvements while your bond is active.
The Beginner’s Guide to Bidding and Winning Public Jobs
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
Construction Bonding Capacity Explained
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.
Building Strong Financials for Higher Bond Limits
Increase Your Bond Limits with Strong Financials
Surety companies review financial statements to assess a contractor’s ability to handle larger projects. To secure higher bond limits, your financials should demonstrate:
- Sufficient working capital, cash flow, equity, and profit.
- Proper preparation by a construction CPA for credibility.
Start Small with Construction Bonds
New contractors are typically limited to smaller bonds (under $350K) to prevent financial overextension. This approach:
- Helps build experience with bidding and project completion.
- Avoids costly CPA-prepared financials for small jobs.
- Strengthens relationships with surety companies.
Grow Experience & Bonding Capacity
Once you establish a solid track record, you can bid on larger projects ($350K+). A strong surety relationship is key, as bonds act as a form of credit. Completing larger jobs boosts profits, making CPA-prepared financials easier to manage.
