In the construction industry, construction bonds are an important part of the bidding process. As a contractor, here's what you need to know about construction bonds.
What are Construction Bonds?
Construction bonds are a product that guarantees the contractor will complete the job according to the project contract. Typically, they're required by governments for public jobs and by general contractors and private entities that bid projects to subcontractors.
Your construction bond, also called a bond line, is a pre-approved dollar amount. You'll have a bond limit per job and an aggregate limit for all the contracts you have at one time. When you bid on a job, it counts against your bond line even if you don't win the contract. For related information, see Contract (Construction) Bonds.
Types of Construction Bonds
- Bid Bond - Guarantees the accuracy of your bid and that you can secure a performance and payment bond from the bonding company if you win the contract
- Performance Bond - Guarantees you'll perform the work as outlined in the job contract
- Payment Bond - Guarantees that the suppliers, subcontractors and laborers you hire will be reimbursed if you go bankrupt before you pay them
- Maintenance Bond - Guarantees your work for a certain time after the job is completed
- Supply Bond - Guarantees your suppliers will deliver the promised supplies, materials and equipment outlined in their purchase orders
- Subdivision Bond - Guarantees you will follow local specifications as you build or renovate public structures in subdivisions
- Site Improvement Bond - Guarantees you will complete certain improvements such as renovations to older structures or updates to existing properties
- Contractor License Bond - Guarantees you will follow contractor regulations and licensing laws (this is technically a license and permit bond but is often considered a construction bond because it's so common)
For more detail on performance and other construction bond types, see Construction Bonds and Performance Bonds.
How to Increase Your Construction Bonds Limit
When you have a high construction bonds limit, you can bid on bigger and more jobs. Use these tips to increase your limit.
- Bid on small jobs. - Bid on and successfully complete small projects to build your reputation and improve your chances of getting higher construction bonds in the future.
- Complete your contracts. - Every time you complete a contract successfully, you establish a track record that can influence a bonding company to increase your bond limit.
- Improve your financial standing. - Hire a construction CPA to prepare financial records that show sufficient working capital, equity, cash flow and profit for your business.
Construction bonds ensure you complete the job properly. They're an important part of your construction business, so understand what they are as you build your career.
If you want help arranging bonds or reviewing your options, talk to an agent.
Frequently Asked Questions
Do public construction projects always require bonds?
Many public projects require bid, performance and payment bonds, but requirements vary by project and jurisdiction.
What is the difference between a performance bond and a payment bond?
A performance bond guarantees the contractor completes the work as specified, while a payment bond ensures subcontractors and suppliers are paid if the contractor fails to pay.
How can I increase my bond limit?
Build a track record by completing smaller contracts, maintain strong financial records, and work with a bonding agent or CPA to present your finances clearly.