BONDING: WHAT'S IT ALL ABOUT?
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Most surety contract bonds -- in the form of Bid,
Performance and Payment Bonds -- are written on public work, which
includes federal, state and local projects. Because construction is a
risky business, laws are in place which require bonds on public work
construction projects; to protect the public funds being used.
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What does bonding mean to the contractor?
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Bonding can mean bigger and better jobs for the contractor.
Being bondable also reduces competition.
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What are Bid, Performance and Payment
Bonds?
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The Bid Bond guarantees that
the contractor who bids the job will enter into the contract and supply
the performance and payment bonds as required.
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The Performance Bond
guarantees that the contractor will perform according to
the terms of the contract.
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The Payment Bond (also called
Labor & Material Bond) guarantees that employees, subcontractors and
suppliers that perform work or supply materials to the project will be
paid. |
So what does it take to get bonded?
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The following are some of the factors (the three C's) for
determining your "bond-ability".
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Character: The Surety company
will seek to determine the contractor's strength of character and
his/her reputation in the eyes of his/her customers and associates.
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Capacity: This represents your
company's ability or capacity in manpower and expertise to tackle the
job you want bonded.
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Capital: The Surety company
will seek to determine whether the contractor has the financial strength
to effectively run all of the work that it currently has in progress and
plans to start in the foreseeable future.
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What informational items will a surety require?
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Most surety companies will (at a minimum) require the
following: |
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An organizational chart
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Current financial statements (prepared by an accountant
or CPA)
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Financial statements for the last two years
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Resumes of key people
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Record of contract performance
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Status of work in progress
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A business plan |
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SBA BOND LINE GUARANTEE PROGRAM: A GREAT
OPTION FOR A YOUNG CONTRACTING COMPANY
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By law, prime contractors to the federal government must
post surety bonds on federal construction projects valued at $25,000 or
more. Many state, county, city, and private sector projects require
bonding. The SBA can guarantee bid, performance and payment bonds for
contracts up to $1.25 million for small businesses that cannot obtain
bonds through regular commercial channels. SBA's guarantee gives sureties
an incentive to provide bonding for eligible contractors, and thereby
strengthens a contractor's ability to obtain bonding and greater access to
contracting opportunities. A surety guarantee, an agreement between a
surety and the SBA, provides that SBA will assume a predetermined
percentage of loss in the event the contractor should breach the terms of
the contract.
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SBA Bond Line Guarantee Program
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Surety charges 2%
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SBA charges $6 per thousand dollars of the contract
amount.
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Unsecured line(s)-of-credit are treated as an increase
to working capital
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Two products in one (a) single amount (b) aggregate
amount
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Bond level computation: 10 times working capital.
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Recommended Growth: 1½ times your largest project
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Type of financial statement required:
Bond Level($) |
Type of Financial Statement |
$200K - $300K |
Compiled Statement |
$301K - $2.5M |
Reviewed Statement: Accountant Required |
$2.51M and Higher |
Audited Statement: Accountant Required |
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Typical Surety Bond (without SBA)
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Surety Charges: |
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2.5% for Bonds less than or equal to $100K
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1.5% for Bonds between $100K and $500K
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1.0% for Bonds greater than
$501K |
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