Bond and Bid and Bond Again
Whether you're a recently licensed insurance agent or a seasoned veteran of the industry, contract bonds can be confusing at times. Between the legalese of the contract language and the internal jargon of the Surety Company, insurance agents tend to go stuck in the middle asking "Tin can we please merely get this bail issued?!" Fortunately, the nuts can be broken downwards into a few cardinal definitions and explanations then agents tin lean on surety experts like BondExchange to secure these of import products for your contractor customers.
To outset, nosotros need to explain the definition of a contract bond. Contract bonds are a type of surety bond that contractors purchase when bidding on or entering into a contract to perform piece of work for a project possessor. The most common types of contract bonds are Bid Bonds and Performance and Payment bonds.
What is a Bid Bond?
Most construction projects commencement with a bidding process, where eligible contractors submit their toll estimates (bids) to the projection possessor. The contractor with the everyman bid is more often than not awarded the project. But how tin can the project possessor be confident that the bidders are qualified to complete the project?
Enter bid bonds. Bid bonds provide financial bounty to project owners that contractors bidding on a project will sign the contract and meet all requirements of the bid specifications, including the ability to provide a functioning and/or payment bond, if the contractor is the winning applicant.
In the event the contractor does not meet these requirements or fails to sign the contract, the surety bond company must pay the project possessor the departure betwixt the winning contractor's bid and the next lowest bidder, merely not more than the bond amount. The amount of the bid bail is commonly calculated equally a per centum of the contractor's bid amount, generally v%, 10% or xx%.
What are Performance and Payment Bonds?
We learned that project owners can ensure they pick qualified bidders by requiring a bid bond. All the same, the bid bond does not protect the projection owner beyond the bidding process. To provide a guarantee that the project will exist completed, owners tin crave a performance and payment bond. Performance Bonds provide assurance to the projection owner if a contractor fails to consummate the work specified in the contract and within the allotted time frame.
Payment Bonds work in conjunction with performance bonds and ensure that laborers, suppliers and vendors will be paid by the contractor, preventing liens on the projection that tin can touch the project owner and the success of the project.
Performance and payment bonds tin can be requested by any projection owner, merely most often these bonds are required for authorities owners (i.e. federal, land, and local regime agencies). On all federally funded projects of $100,000 or more, functioning and payment bonds are required by legislation known every bit The Miller Human action passed in 1935. Many states and municipalities accept adopted so-called "little Miller Acts" that extend similar surety bond requirements to land and local government projects.
What Questions Exercise You Demand to Ask Your Contractor Customers?
Armed with some basic questions, insurance agents can quickly make up one's mind what type of bond will be needed and the information to go the underwriting process started. Nosotros recommend the following questions:
Determine the Type of Bond Needed:
- Are yous bidding on a project or accept you already been awarded the contract? If the reply is bidding, see the follow upwardly questions below on bid bonds. Otherwise, skip down to performance and payment bonds.
- What type of work are you lot performing and do you have experience in this field? The scope of piece of work is important as some projects are more risky than others.
For Bid Bonds:
- What date does the projection bid? For bids coming up soon, agents will need to act fast to secure the bid bond.
- Exercise you take a copy of the bid specifications or asking for proposal? These documents provide the surety underwriter information on the project like estimated fourth dimension frames, engineer's estimates, warranty periods, and penalties for delays.
- What is your estimated bid amount for the project? The underwriting will vary depending on the amount of the project. Typically, small projects (nether $500,000) can be underwritten based on the owner's personal credit. For larger jobs, underwriters will review business financials and more than details about the contractor to make up one's mind eligibility.
For Performance and Payment Bonds:
- Was a bid security required? If and then, did the contractor provide a Bid Bond or a cashier's check? If they used a bid bond, why are they not using the bid bail company to issue their performance and payment bond?
- How long has the contractor been in business? New businesses are generally limited to smaller projects until they have at least 1 yr in business.
- What is the total project cost? Larger jobs will require more than in depth underwriting.
- What is the contractor'southward largest completed job to appointment? If the project is significantly larger than jobs the contractor has completed in the past, the surety visitor is likely to decline the bail.
Now that we know how to determine the type of bond, your customer is probably going to ask, "How much does the bond price?"
How Much Does it Cost for Bid Bonds or Performance and Payment Bonds?
Surety companies do not typically charge premium for Bid Bonds; however, most brokers non named BondExchange, accuse fees to issue them.
Performance and Payment Bond premium rates are determined by the surety company based on the contractor's credit, financial stability, and experience. Rate structures also vary based on the projection size with smaller projects (under $1 one thousand thousand) typically conveying a 3% rate versus larger projects with rates ranging from 1% to 3%.
Most larger projects are rated using a sliding scale. Below is an example of the premium price for a $one million bond:
Sample $1,000,000 Performance and Payment Bond Cost
| Bond Corporeality | Premium Rate | Bail Cost |
|---|---|---|
| First $100,000 | 2.5% | $2,500 |
| Next $400,000 | i.5% | $6,000 |
| Next $500,000 | ane% | $5,000 |
| Full toll of $13,500 |
Sometimes project costs run over the initial bid results, which upshot in an overrun . Considering the premium is based on the bail corporeality, the surety company will charge an additional premium for the price divergence betwixt the accepted bid and the terminal project cost. By contrast, projects completed for an amount lower than the initial bid will incur an underrun and the surety company will refund the difference in premium between the accepted bid and the last projection price.
One last of import annotation on cost, the pricing for performance and payment bonds assumes both bonds volition be issued and the rates above are the full for both bonds.
Why Should Agents Offering Contract Bonds?
Performance and Payment Bonds not but provide pregnant commission opportunities for agents, but can also help to create sticky customer relationships. Agents that tin can tackle the often misunderstood surety bond product for contractors go trusted advisors to their contractor clients, leading to increased retention and cantankerous-selling opportunities.
Initial underwriting for contract bonds can be fairly intrusive and comprehensive for your contractors, only one time a surety line is established, the procedure going forward is pretty painless. Most contractors vigorously avoid the underwriting procedure, so securing that kickoff bond is the central to success. BondExchange has groovy programs for emerging contractors that tin can position your agency to tackle the first bond with ease so you can capture business organisation as the contractor'southward business grows.
Construction contracts also often crave other insurance products like full general liability and workers compensation, opening up an like shooting fish in a barrel cross-selling opportunity.
How Can an Insurance Agent Obtain Bid Bonds and Performance/Payment Bonds?
BondExchange makes obtaining Performance and Payment Bonds easy. We have adult programs for emerging contractors that require very limited underwriting for projects upwards to $1 one thousand thousand in size. We can also help contractors with large, complex projects and even contractors with challenged credit. Our access to over 30 leading surety markets ensures we can secure your customer's bail for nearly every situation.
Simply login to your account and use our keyword search to find "contract" bonds in our database. Don't have a login? Enroll now and let united states help you satisfy your customers' needs. Our friendly underwriting staff is available by phone, email or conversation from vii:30 AM to 7:00 PM EST to assistance you.
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Source: https://www.bondexchange.com/understanding-bid-bonds-and-performance-and-payment-bonds/
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