Construction Surety Bonds: Creating Opportunity for Small and Medium Size Contractors

In construction, especially for most government development projects, surety bonds will be required for companies even for preliminary bids. Federal or state projects require contractors to acquire construction surety bonds for the development or repair of any structure or public work.

In our latest blog, we have rounded up industry-related news and expert tips from journalists and bloggers to provide insight on construction bonds and how a new bill is designed to help small- to medium-sized firms secure government contracts.

In today’s competitive construction market, getting a construction surety bond can set an organization beyond its competition and help them get the needed work fully completed.

According to Clayton Clive, blogger, in his blog entitled “Everything You Need to Know about Construction Contract Surety Bonds,” he explained that “these bonds also guarantee that certain subcontractors, laborers, and material suppliers will be paid so that project is completed free of all items.”

With surety bonds, you will find an agreement between three entities:

First is the obligee. In this case, it is the government or public acting as the beneficiary the work is being performed for.

Next is the principal. It is the contractor doing work for the obligee.

And the last is the surety. It is the bonding company that guarantees the principal will perform the job for the obligee.

Large-scale contractors secure nearly all surety bonds for construction projects. All federal construction projects beyond $30,000 require payment protection and all above $100,000 require performance bonds and payment bonds. All states require construction bonds on state and local public works projects.

Small contractors, laborers, subcontractors, and suppliers on public projects usually depend on the general contractor’s payment bond for protection. In waiving the bond, these parties will have nothing to collect payment for their services if the general contractor is unable or disinclined to pay them. Small and minority contractors typically start as subcontractors. If no bonds are in place, these subcontractors will either have to risk losses from non-payment that they cannot afford or not obtain public jobs for which they are qualified.

According to a sponsored Contract Surety 101 write-up by SFAA: What You Need to Know about Contract Surety Bonds:

“Waiving bonds hurts small and minority contractors. If bonds are waived, the small contractor may never receive his or her business review from a surety and will not have the opportunity to build a successful track record with the surety company.”

Also:

“Raising bond thresholds exposes small and minority contractors to loss. Raising bond thresholds increases the risk of non-payment and contractor default due to the lack of a surety’s extensive prequalification process. Failure to get paid can be catastrophic to small contractors.”

Good news! There’s a new bonding assistance program for small contractors.

Todd Bryant, in his Insurance Journal News article, New Bill Grants Bonding Assistance to Small Businesses in New Jersey, announced that Governor Chris Christie has launched a new program that will support small businesses in the New Jersey state through funding and education when bidding on public or federal contract projects.

“This comes as small businesses involved in construction are sometimes unable to secure surety bonds to bid and perform on public or federal construction and improvement projects.” 

Due to higher rates, small businesses struggle with securing the necessary construction surety bonds and adhering to its strict requirements. This dilemma makes them unable to compete with bigger general contractors who have already established a strong relationship with surety bond companies because of size and financial capacity.

However, with the new bill, it will increase competition for public projects, which leads to “lower costs and a more diverse pool of small businesses performing public services.”

Brian Anderson, who writes for Contractors Insurance LA, notes about the Importance of Surety Bonds for Contractors in LA and agrees that large projects need huge money so some companies, like small businesses, may find it tough when dealing with such projects. Nevertheless, small and minority contractors may seek assistance from bond companies.

“During the bonding process, qualifications of concerned parties are checked to enhance the provision of quality work.”

Surety bonds continue to be a comprehensive and reliable method for minimizing risks in construction projects. With the signing of the new bill, it would start helping many subcontractors and small business suppliers in obtaining a surety bond and propel change in the surety bond landscape across all states.

For more information on construction surety bonds, visit Surety Bond Authority and let us help you bid on that project. Call us now at 800-333-7800.