Principal means, in the case of a Bid Bond, the Person bidding for the award of a Contract. “Obtaining bonds is more like obtaining bank credit than purchasing insurance.” Contractors must qualify for surety bonds through the surety’s prequalification process. An overrun occurs when the contract amount is increased or when the project exceeds the expected completion date for the contract. Overruns are not performance bond renewals but represent additional exposure to the surety backing the bond. Therefore, when the surety learns of an overrun, either from a status check or from a completion notification, the surety will bill the principal for any additional exposure created from the overrun. Finally, the general contractor repays the claim amount to the surety.

Fast-track bonds are typically charged at a higher rate depending on the surety and can differ in single and aggregate limits. Standard program rates can be remarkably less, allowing the contractor to bid more competitively and improve profit margins. Most surety companies file their individual rate plans with the various insurance departments of the states in which they operate. Almost all surety companies file multiple rate plans along with prequalification requirements for each category.

License and Permit Bonds

Construction bond, also known as a contractor license bond, is a required bond for a construction project. A contractor is required to have construction bonds for construction bookkeeping nearly all government and public works projects. A contractor vying for a construction job is generally required to put up a contract bond or construction bond.

Most rate plans are financial requirements based on net worth, sales volume and quality/frequency of financial reports. Once a contractor gains a basic understanding of how its particular financial position affects its bond capacity, it is better prepared to effectively manage financials and backlog. Every contractor should review the business plan and then develop a financial strategy to maximize working capital and equity. With assistance from a CPA and bonding agent, a contractor can map out a successful strategy for maintaining adequate bonding levels.

Agreements Between Contractors & Subcontractors

As the name implies, the bank guarantees that a borrower will fulfill its obligations to a contractor with bank guarantees. The bank will typically charge a fee for providing the services and taking on risks. Performance bonds are also common in the real estate industry as they share many of the risks present in the construction industry. For example, Dave’s Property Management Services hires a real estate developer to build a new office building for its real estate portfolio in downtown Manhattan, New York. As a result, the developer agrees to complete the work and gets a performance bond issued by the ABC Bank. The project is valued well over the required $100,000 and will cost $10 million to complete.

• Any business following Generally Accepted Accounting Principles are required to implement the new requirement.
• They may also ask for personal indemnity or collateral, based on your financial and organizational strength.
• Depending on the cost of the bond, it may be a significant savings for a contractor over the life of a project.
• Therefore, when the surety learns of an overrun, either from a status check or from a completion notification, the surety will bill the principal for any additional exposure created from the overrun.
• We sit down with them and explain how accounting affects their balance sheet.
• When a contractor fails to abide by any of the conditions of the contract, the surety and contractor are both held liable.