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Want to know more about Performance Bonds including what they guarantee, what do they cost and how do you get one? The video below explains everything contractors need to know about the basics of Performance Bonds.

A transcript of the video and a link to instantly purchase Performance Bonds is below the video.



[Video Transcript]

This is Matt. Matt is a contractor who has just been awarded a new construction project. When Matt meets with the project owner, he tells Matt that a performance bond will be required on the project. Unfortunately for Matt, he doesn't know what a performance bond is, what it will cost, or how to get one.

Fortunately, Matt remembers he knows Josh at Axcess Surety. When Matt arrives at Axcess, he has a lot of questions for Josh. Josh explains that a performance bond is a three-party agreement. The contractor is called the principal and is making a guarantee to the project owner, or higher-tier contractor. This party is called the obligee. The surety is a third-party bond company that is backing the contractor's performance. The performance bond guarantees that the contractor will complete the project according to the contract and specifications.

A performance bond provides the obligee with valuable protection. If the contractor does not complete the contract, the bond company will step in and finish the project, or provide capital to complete the construction. Josh warns Matt that performance bonds require indemnification. The contractor must sign an indemnity agreement with the bond company. If a loss happens and the bond company has to pay out, they will seek to be reimbursed by the contractor and other indemnitors.

It is common for company stockholders to indemnify the bond company personally. Josh tells Matt that a performance bond generally costs between 0.5% to 3% of the contract amount. A performance bond cost is based on the type of work being performed, the underwriting strength of the contractor, and the surety's filed rates in that state.

So how do you get a performance bond? It depends on the amount. For performance bonds $1 million and less, most contractors can get one with just a simple credit check. For larger projects, a contractor must go through underwriting referred to as the three Cs, which stands for credit, character, and capacity. Credit refers to a contractor's financial strength, and underwriters will look at company financial statements, personal financial statements, available credit, project trends, et cetera.

Capacity refers to a contractor's ability to handle the project and total workload. Bond underwriters will review a contractor's equipment, staff, estimating and accounting systems. Character refers to a contractor doing what they say. Often, underwriters ask for project references, supplier references, and interviews with key management.

Matt wants to know what else he should know about performance bonds. Josh tells him that performance bonds are often written with other contract bonds, such as payment bonds and maintenance bonds. Josh also tells Matt that he should check to make sure the performance bond meets the contract requirements. It is common for contracts to require a performance bond that is listed on the US Treasury 570 Circular. This is also referred to as a T-listing.

Additionally, many contracts require that the performance bond company have a rating of A- or better from a rating service such as A.M. Best. Not meeting these requirements could result in a contractor's performance bond being rejected. Matt has his performance bond and the project can start. If you need a performance bond or have any questions on surety, do what Matt did and call Axcess surety today.

Performance Bonds and Bid Bonds are both important types of construction bonds. However, these are two very different tools with different guarantees. Learn more about what separates these contract bonds. 


What is a Bid Bond?


A Bid Bond is a type of contract surety bond that guarantees that a contractor will honor their bid amount and enter into a contract if awarded. A Bid Bond protects the project owner or General Contractor by making sure that the bidding party does not back out of their bid or increase the bid price. If the bidding contractor will not enter into a contract at the bid price, an Owner can file a claim on the Bid Bond.


What is a Performance Bond?


A Performance Bond is a type of contract surety bond that guarantees that a Contractor will complete a project according to the contract and specifications including the contract price. A Performance Bond protects a Project Owner or Upstream Contractor by ensuring that they get a project completed at the agreed upon price. 


Similarities in Bid Bonds and Performance Bonds


Parties to the Bonds


Both Bid Bonds and Performance Bonds have the same parties involved. This is usually a Contractor who is bidding the project or performing the work. This party is called a Principal on both of the bonds. The Project Owner or Contractor that is benefitting from both bonds is called the Obligee. Both bonds are written by a Surety who is the bond company that is backing the Contractor’s guarantee on both Bid Bonds and Performance Bonds. 


Bid Bonds vs Performance Bonds - This chart shows that both bid bonds and performance bonds have the same three parties which are a Principal, Obligee and Surety. This chart has colorful tools all around it.




Underwriting is the same for both Bid Bonds and Performance Bonds. The contractor must be underwritten by a surety bond company in order to receive both bonds. This underwriting process is referred to as the “3Cs” which stands for Credit, Capacity and Character. 




Credit refers to a Contractor’s financial capacity to complete the project being bid or built, along with the contractor’s other workload. Surety Bond underwriters review a contractor’s business and personal financial statements, bank statements, work in progress, and credit reports to determine if the contractor can qualify. This often involves assessing a contractor’s liquidity and project trends. 




Capacity refers to Contractor’s non-financial ability to complete the project being bid or built. Bond underwriters assess a contractor’s equipment, labor force, supervision, management, accounting and estimating systems to determine if they are likely to have the resources to complete their projects or if additional investments may be needed. 


Experience is an important part of Capacity. Usually surety bond companies do not want to support bid bonds or performance bonds for contractors that are larger than 2 -4 times as large as a previously completed project. 




Character refers to a Contractor’s history in keeping their commitments. Character is the hardest to underwrite, but bond underwriters want to make sure that a contractor will finish the bonded projects, even if things go bad. Underwriters will often ask for project references, supplier references, and analyze a contractor’s track record. 


Underwriting Bid Bonds and Performance Bonds is similar because a Surety Bond underwriter must assume that a contractor is going to be low bidder, awarded the project and that they will eventually have to issue Performance Bond and Payment Bonds on the project. 


Indemnity on Both Bid Bonds and Performance Bonds


Bid Bonds and Performance Bonds are both a type of contract surety bond. All surety bonds require indemnity. Indemnity means that if the bond company pays a valid claim on either a bid bond or a performance bond, they will seek reimbursement from the contractor and any indemnitors. More can be read about indemnity here.


Validation Requirements




Both Bid Bonds and Performance Bonds need the surety bond company’s seal in order to be valid. This seal can be a raised seal “wet seal” or it can be electronic. The important thing is that it matches the seal on the Power of Attorney included with the bond. 


Power of Attorney


Both Bid Bonds and Performance Bonds need to be accompanied by a valid Power of Attorney to be enforceable. A power of attorney should match the name of the Surety Bond Company listed on the bond. The Power of Attorney will list the Agents and Brokers that are authorized to sign the bond on behalf of the surety bond company. The Surety signature on either bond should match one of the names listed on the Power of Attorney. 


Signature Required


Both Bid Bonds and Performance Bonds need to be signed by both the Principal Contractor and a representative from the Surety Bond Company. As mentioned above, the signature from the Surety should match a name listed on the Power of Attorney. Signatures can be either electronic or original and depends on the Obligee. Many Obligees will accept electronic signatures for Bid Bonds but prefer original signatures for Performance Bonds. These requirements keep changing with technology though. 


Rating Requirements


Although it varies from contract to contract, there is typically the same rating requirement for both Bid Bonds and Performance Bonds. If a bid specification requires a bid bond company to be rated “A-” or better by service such as A.M. Best, a Performance Bond will typically have the same requirement. 



Bid Bonds vs Performance Bonds - This colorful chart compares 4 aspects of bid bonds vs Performance Bonds. In the background is a construction site.


Differences in Bid Bonds and Performance Bonds


Although they are both contract surety bonds, Bid Bonds and Performance Bonds have some important differences as well. 




The cost of these two bonds is significantly different. Most surety bond companies and bond brokers do not charge for bid bonds. If there is a charge, it is usually minimal such as $100 for administration. On the other hand, Performance Bonds do carry a charge. Performance Bonds normally cost between 0.5% - 3% of the contract amount. Performance Bond Cost depends on several factors including the underwriting strength of the contractor, the type of work and the surety bond company’s filed rates in the state where the project is being built. You can read more about how Performance Bond Costs are determined here


Bond Amount or Bond Penalty


Bid Bond Amounts and Penalty


The amount of the bond varies significantly for Bid Bonds and Performance Bonds. Bid Bonds are written as a percentage of the contractor’s bid. 5%, 10%, 15% and 20% are all common bid percentages, but a bid bond on a private project could be in any amount. The bid bond amount is the maximum a surety bond company and contractor would have to pay if there is a claim on the bid bond. 


For example, if a contractor bids $1 million on a project and has a 5% bid bond, the most an Obligee could claim on the bond is $50,000 ($1,000,000 x 5%). The penalty could be even less though. For example, say the second bidder on the project bids $975,000. If the contractor does not move forward, the bid bond penalty is only the difference between the two bidders which would be $25,000. 


More detail can be read about bid bonds and bid bond claims here


Performance Bond Amounts and Penalty


On the other hand, the bond amount and penalty on a Performance Bond is much greater. Performance Bonds are written for 100% of the contract amount. That means that on the same $1 million contract, the surety bond company and contractor could be liable for the full $1 million. Regardless of how much the contractor completes, the Surety must complete the job, or pay for completion up to the $1 million bond amount. 


More can be read about Performance Bonds and Performance Bond Claims here




As discussed earlier, Bid Bonds and Performance Bonds have different guarantees. However, they are also related. If a contractor uses a bid bond to bid on a project and then is awarded the project, the owner may ask the contractor to provide a Performance Bond and Payment Bond on the project. Although the guarantees are different, they work in conjunction with each other. 


Understanding different types of Surety Bonds can be complicated. The experts at Axcess Surety can help you understand whether you need a Bid Bond or Performance Bond and how to obtain them. Contact our surety bond experts anytime. 

The Miller Act


What is The Miller Act and how does it affect contractors, taxpayers and Surety Bond Companies? Learn more about this important piece of legislation.


What is The Miller Act?


The Miller Act (40 U.S.C. §§ 3131-3134) is a piece of legislation enacted in 1935 that requires Contractors fulfilling construction contracts of $150,000 and above, to post a performance bond and a separate payment bond on the project. Additionally, the law requires a payment bond alone when a project exceeds $30,000.


Specifically the law states, "The Miller Act as implemented by the FAR, provides that, before a contract that exceeds $150,000 for the construction, alteration, or repair of any building or public work of the United States is awarded to any person, that person shall furnish the federal government with the following:


A performance bond in an amount that the contracting officer regards as adequate for the protection of the federal government. The FAR establishes an amount of 100% of the contract price as the rule. An exception to this rule requires a specific determination by the contracting officer that a lesser amount provides adequate protection.


A separate payment bond is required for the protection of suppliers of labor and materials. The amount of the payment bond must be equal to the total amount payable by the terms of the contract. The FAR establishes an amount of 100% of the contract price as the rule. 


A deviation from this rule requires the contracting officer to make a written determination supported by specific findings that a payment bond in that amount is impractical, in which case the amount of the payment bond shall be set by the contracting officer. The amount of the payment bond may not be less than the amount of the performance bond."


In other words, a contractor doing construction work on most Federal projects of $150,000 or more must post a performance bond for 100% of the contract amount and a separate payment bond for 100% of the contract amount. 


The performance bond guarantees that the  Prime Contractor (General Contractor) will complete the project according to the contract and specifications. The payment bond guarantees that the contractor will pay their Subcontractors and Material Suppliers.


Both the performance bond and the payment bond must be included on the United States Treasury Department's 570 Circular of surety bond companies approved to do business with the U.S. Government.


History of The Miller Act 


Basic forms of lien laws go back hundreds of years. However, modern mechanic's liens in the United States are often attributed to Thomas Jefferson. 


Mechanic's Liens protect contractors, Subcontractors, and material suppliers against non Payment. Should a party not be paid for work or material, that party can file a Mechanic's Lien on the project. The Mechanic's Lien is a Public record and creates a security interest in the property. In practicality, the property owner is usually unable to sell or borrow against the property until the lien is satisfied.


Understandably, this system of filing liens does not work on Federal Property. Imagine an unpaid Subcontractor having a lien against The White House or National Park. Clearly this would not be in the General Public's best interest.


Similarly, imagine a Federal Building under construction. Congress approved $1 million of taxpayer money to build the project. However, after paying the contractor $1 million, the project is only 10% complete and the contractor files bankruptcy. It would not be good for the Public to have unfinished projects or to have to spend more money to complete these projects.


These are the problems Congress was finding on Federal construction projects. To combat these issues, they signed The Heard Act into law in 1894. The Heard Act allowed for Corporate Surety Bonds on Federal projects. It also required a single Performance and Payment Bond on Federal projects. 


Although this provided some protection to contractors and suppliers, The Heard Act was written narrowly and therefore faced many legal challenges that were often interpreted against subcontractors and suppliers. Therefore, in 1935, Congress replaced The Heard Act with The Miller Act.


Who is Covered by a Miller Act Payment Bond?


It is important to understand who has protection under a Miller Act payment bond as not all parties are covered.The Miller Act payment bond specifically covers four parties. These are:


First Tier Subcontractors

These are Subcontractors that have a direct contract with the Prime Contractor.


First Tier Material Suppliers

These are Material Suppliers that have a contract with the Prime Contractor.


Second Tier Subcontractor

These Subcontractors have a contract with a First Tier Subcontractor.


Second Tier Material Supplier

These are Material Suppliers that have a direct contract with First Tier Subcontractors.


You will notice that many parties are excluded. For example, a Material Supplier who supplied Material to a First Tier Material Supplier would have no protection.


"'Subcontractor' means any person who has contracted to furnish labor or materials to, or who has performed labor for, a contractor or another subcontractor in connection with a construction contract." N.C.G.S. § 44A-26


This chart shows the tiers of Subcontractors and suppliers protected and not protected by a Miller Act Payment Bond. The background is black and white road construction. Each Tier is blue or red.


What is Covered by a Miller Act Payment Bond?


Coverage under The Miller Act is broad. Various rulings have included things such as:



In order to qualify the supplier only needs to show in good faith that the material was intended to be used in the project.


What is Covered by the Miller Act Performance Bond?


The performance bond covers the cost to Complete the project if the Prime Contractor cannot. A Miller Act Performance Bond also cover taxes on wages that are needed to complete the project.


Miller Act Claim Notice Requirements


Unfortunately, bond claims happen. When they occur on a Miller Act project, there are notice requirements that need to be followed. These can be confusing and depend on the Subcontractor or Material Supplier's relationship to the Prime Contractor.


Miller Act Payment Bond Claim Filing Requirements - This shows two boxes with the timing Requirements for parties filing a Miller Act Payment Bond Claim. The background is an hourglass.


First Tier Subcontractors and Material Suppliers 


First Tier Subcontractors and Suppliers that have a direct contract with the Prime Contractor must wait at least 90 days after they last supplied labor or material to the project before filing a claim against the payment bond 40 U.S.C. § 3133(b)(2).This is thought to be a reasonable amount of time for project funds to flow from the owner to the Subcontractor or Supplier.


From a practical standpoint, a First Tier Subcontractor or Supplier does not have to give notice to the Prime Contractor or Surety. However, it likely should in order to try and resolve the issue quickly. A civil action must be brought no later than one year after the last labor or material was provided on the project.

Second Tier Subcontractors and Material Suppliers 


Second Tier Subcontractors and suppliers must file a claim within 90 days of the last labor or material provided on the project. The purpose of this timing is to make the Prime Contractor aware of nonpayment on lower tiers. This gives the Prime Contractor the opportunity to potentially withhold contract proceeds from the First Tier Subcontractor or Supplier to correct the issue.


Requirements for Second Tier Subcontractors and Suppliers Notice






Failure to provide proper notice under a Miller Act Payment Bond is a valid defense that can keep a Subcontractor or Supplier from being able to collect.


Filing Suit Under The Miller Act


If a civil action is needed, a case may be brought in a United States District Court and the Surety Bond company names as the Defendant. The civil action is brought in the name of the United States although the U.S. is not responsible for any expenses or payments associated with the suit.


Miller Act Protection Waiver


A Prime Contractor can not require a Subcontractor or Supplier to waive their right to a Miller Act Payment Bond in order to enter into a contract. Such a clause would be unenforceable.


However, a civil action can be waived, but only after the Subcontractor or Supplier has already provided labor or material on the project. In such cases, the waiver must be in writing and signed by the party whose right has been waived.


Courts have sided with General Contractors who insert contract language that stays the claim pending a dispute with the Owner. This contract language should be carefully reviewed and considered.


Exceptions to the Miller Act Bond Requirements


Foreign Country Waiver - 

A Contracting officer may waive The Miller Act's bond requirements if they find that it would not be practical to do so.


Cost Plus Contracts -


Secretaries of the Army, Navy, Air Force, and Transportation may waive the requirements 


“with respect to cost-plus-a-fixed fee and other cost-type contracts for the construction, alteration, or repair of any public building or public work of the Federal Government and with respect to contracts for manufacturing, producing, furnishing, constructing, altering, repairing, processing, or assembling vessels, aircraft, munitions, materiel, or supplies for the Army, Navy, Air Force, or Coast Guard, respectively, regardless of the terms of the contracts as to payment or title.” 


Construction of Vessels -


The Secretary of Transportation and The Secretary of Commerce may waive the requirements on certain contracts for the construction and alteration of vessels.


Additional Bonds May be Required - 


A contracting officer may also require additional bonds or protection if they are needed.


Right to Obtain a Copy of a Miller Act Bond


Any party providing labor or material on a Miller Act contract has the right to request a copy of the bond from the contracting officer. A signed request is required.


In practicality, it is always better to request a copy of the payment bond upfront when signing a contract with the Prime Contractor.

Little Miller Acts


The Miller Act applied to Federal work but many states and municipalities have adopted legislation. These laws are often referred to as "Little Miller Acts". Although these Little Miller Acts are similar, they can differ in a number of ways. It is important to check local laws before signing a construction contract.


The Miller Act has and continues to be an important piece of legislation for protecting taxpayers, contractors and material suppliers in the U.S. Each party should know their rates and responsibilities under the Act to ensure that these protections are available when needed.

What are Subcontract Bonds?


Subcontract Bonds are Performance Bonds or Payment Bonds issued for a Subcontract Agreement between a contractor and a lower tier Subcontractor.

Subcontract Bonds are an effective form of risk management on a project. 


Who Are the Parties to a Subcontract Bond?


Parties to a Subcontract Bond - This shows the 3 way relationship between the Subcontractor, Surety and General Contractor in a Subcontract Bond. The border is construction tools and a hardhat.


The Principal on a Subcontract Bond is the Subcontractor. They are responsible for fulfilling the contract obligation. The Obligee on a Subcontract Bond is the General Contractor or it could also be an Upstream (higher tier) Subcontractor. The Surety is a third party bond company that is guaranteeing the Principal’s obligation.


When Are Subcontract Bonds Required?


Subcontract Bonds are not a requirement by The Miller Act. Instead, they are used by contractors as a way to prevent Subcontractor Default and to keep the projects free of mechanic's liens.


Subcontractor Failure is one of the biggest risks faced by contractors. Subcontract Bonds can be a cost effective way to help mitigate this risk.


Subcontract Bonds may also be required by other parties such as a Contractor's bond company or lender. It is common for a bond company to require Subcontract Bonds on critical path trades, unique scopes of work or subcontracts over a certain value such as $250,000.


What Do Subcontract Bonds Cost?


The cost of Subcontract Bonds depends on the type of work being performed, and the qualifications of the Subcontractor (also known as the 3Cs). Generally this coat is between 0.5% - 3% of the Subcontract amount. You can read more about the price of these bonds here.

Subcontract Bond Cost - This green box shows that Subcontract Bonds cost between 0.5% - 3% of the project amount. The background is a couple of contractors looking at blueprints.

Are Subcontract Bonds Needed if The General Contractor is bonded?


Subcontract Bonds are often needed even when the General Contractor provides Performance Bonds and Payment Bonds on a project. The General Contractor's Performance Bond protects the Project Owner by making sure the project is finished according to the contract. 


However, it does nothing to protect the General Contractor. The Subcontract Performance Bond protects the General Contractor by making sure a Subcontractor finishes their scope of work according to the underlying contract.


A General Contractor's Payment Bond does protect some parties but not all. Under a typical Payment Bond, 1st and 2nd tier Subcontractors are protected along with 1st tier Material Suppliers. 


However, that leaves lower tier Subs and Suppliers without protection. By requiring Subcontract Bonds, Payment protection can be extended to lower tier Subcontractors and suppliers.


How to Obtain Subcontract Bonds


Subcontract Bonds are underwritten like other forms of Contract Surety Bonds. Subcontract Bonds $1 million and less can usually be written with a simple application and a credit check of the owners.


Larger Subcontract Bonds require company financial statements, stockholder financial statements, project information and an application.


There are some additional risks that make Subcontract Bonds more challenging than construction Bonds written to General Contractors. These are discussed below.


Challenges to writing Subcontract Bonds


The biggest challenge to writing Subcontract Bonds is Onerous Terms from the Upstream Contractor. A look at some common ones are below.


Flow Down Clauses


A Flow Down Clause or Provision makes the Subcontractor bound to the same terms and conditions as the General Contractor. This can be a challenge for a Subcontractor and their Surety Bond company as they have no direct connection to the Project Owner.




Surety Bond companies prefer that Subcontracts spell out Liquidated Damages. However, some contracts require a Subcontractor to share in the Liquidated Damages that the General Contractor incurs. This creates extra risk and uncertainty for the Subcontractor and their surety. It is preferable to have a set limit in the subcontract.


Payment Terms


Payment Terms are a major concern for all Subcontractors and are scrutinized closely by surety bond underwriters before writing Subcontract Bonds. Slow payments create stress on cash flow and can put a contractor into a bond claim.


Surety Bond companies frown upon contingent Payment clauses such as "Pay-if-Paid" and "Pay-when-Paid" language. In fact, it is likely that a bond company will not want to write a Subcontract Bond if Pay-if-Paid language is in the underlying contract.


Alternatives to Subcontract Bonds


There are a number of alternatives to Subcontract Bonds and each carries advantages and disadvantages.


Subcontractor Default Insurance 


Subcontractor Default Insurance is an insurance policy taken out to protect the General Contractor against Subcontractor Default. Two big advantages to SDI are the speed at which claims can be paid and that the General Contractor can profit from good loss management.


The downsides to SDI are that it is not first dollar coverage meaning the General Contractor must share in the loss. Also, it does not usually offer any protection to other parties. More can be read about SDI vs Surety Bonds here.


Subcontractor Pre-qualification 


Subcontractor Pre-qualification is the process of reviewing a Subcontractor to determine if they have the capability to finish the contract without defaulting. 


A typical Pre-qualification process involves reviewing a Subcontractor's financial history, insurance, and experience. 


Pre-qualification is a great tool and required by most SDI policies. The biggest drawbacks are that it provides no financial reimbursement if a Subcontractor defaults and it can be costly to perform.


Indemnity on Subcontract Bonds 


Like all surety bonds, Subcontract Bonds Require Indemnity. That means if the bond company pays a valid loss, they will seek reimbursement from the Principal Contractor and any other indemnitors.


Subcontract Bonds remain an important risk management tool to ensure that Subcontractors complete their projects and pay their bills. These bonds are easy to obtain for most Subcontractors contact Axcess Surety anytime for all your surety questions and needs.

Performance Bonds are often confused with Payment Bonds. Learn more about these two types of contract bonds, how they are different and how they are often used together.


What is a Performance Bond?


A Performance Bond is a type of contract surety bond. A performance bond guarantees that a project will be completed according to the contract. Performance Bonds are important to make sure that buildings are finished and not left incomplete.


These bonds are typically used in construction contracts but can guarantee many types of other obligations such as service contracts.


What is a Payment Bond?


A Payment Bond is also a type of contract surety bond. Unlike a performance bond, a Payment Bond is used to make sure that Subcontractors and Material Suppliers on the project are paid. These bonds are important because they ensure that a project will be free of mechanic's liens.


Performance Bond vs Payment Bond - This shows the difference between an performance bond and payment bond in a green box. In the background is a construction hardhat, hammer and blueprints.


Both Bonds are Required by Law


Federal construction contracts that are $150,000 or more require that the contractor post both Performance Bonds and Payment Bonds. This is required by The Miller Act


By requiring these bonds, the Federal Government makes sure their buildings are completed (Performance Bond) and that Subcontractors and Material Suppliers are paid (Payment Bond). This is very especially important on Federal projects as you cannot file mechanic's liens on Federal Buildings.


Additionally, most States and municipalities have adopted similar requirements for Performance Bonds and Payment Bonds on their projects. These are often referred to as "Little Miller Acts".


Costs of Performance Bonds vs Payment Bonds


Performance Bonds and Payment Bonds are rated the same way. These bonds are priced according to the size of the contracts they guarantee. 


Both performance bonds and payment bonds are often priced on a sliding scale where the rates get cheaper as the contract size increases. However, flat rates are common as well.


Typical pricing for both performance bonds and payment bonds range from 0.5 % of the contract amount to 4%. The price depends on the type of work, the financial strength of the contractor and the bond company's filed rates. 


You can read all about Performance Bond and Payment Bond Costs here.

Same Price for Both Performance Bonds and Payment Bonds 


Many parties do not realize that there is only one cost to have both a Performance Bond and a Payment Bond on a project. It really is twice the protection for one cost. From a cost standpoint, there is no reason to have both bonds on a project.




Performance Bonds and Payment Bonds are underwritten using the "3Cs". These stand for Credit, Character, and Capacity. This takes into account a contractor’s financial strength, equipment, manpower, internal controls and previous history.


There are specific underwriting considerations for both Performance risks and Payment risks. As discussed, both performance bonds and payment bonds are required together on must Public work. When both bonds are required, the Surety bond underwriter has to analyze both the performance risk and the payment risk. Some private contracts only require one bond or the other, however.


Performance Bond Underwriting Risk


Performance specific risks include things like the type of work. For example, an underwriter may be concerned if a contractor is completing a project outside of their experience such as a school contractor trying to build a treatment plant. 


Experience could also apply to a contractor taking on a different trade such as a General Contractor performing concrete work for the first time.


Location could be another performance risk. Traveling to a new area carries additional risk for contractors and bond companies.


Payment Bond Underwriting Risk


Payment Bond specific risk could include things such as project financing. Often a contractor will not be able to pay subcontractors and suppliers if they are not paid themselves. Bond underwriters may want to know financing for the project is approved by the lender and set aside.


Another large risk is Payment terms. Bond underwriters look at contract terms and particularly scrutinize language such as contingent Payment clauses. These clauses often contain "pay if paid" or "pay when paid" language that presents risk to the contractor and payment bond.


Performance Bonds and Payment Bonds Require Indemnity


Both of these bonds are a type of contract surety bond and are not insurance. These bonds require the contractor to sign an indemnity agreement. If a surety bond company pays a valid claim on either a performance bond or payment bond, they will seek reimbursement from the contractor and any indemnitors.


It's easy to confuse Performance Bonds and Payment Bonds. In most cases both bonds are required together. Axcess Surety has expertise in all types of bonds and our experts are standing by to help answer questions and make the process easy. Contact us anytime.


Subcontractor Default Insurance and Performance Bonds both protect against subontractor Default on a project. Learn more about the differences between these two tools and which is right for your project.


What is Subcontractor Default Insurance?


As the name suggests, Subcontractor Default Insurance or SDI is an insurance policy that protects the policyholder against an economic loss caused by the default of one of its covered subcontractors. Some contractors still refer to SDI as "SubGuard", which was the original program developed by Zurich.


Like most Insurance policies, SDI is a two party agreement between the insurance carrier and the policyholder (General Contractor or Construction Manager).


The increase in SDI usage has caused additional Insurance companies to enter the market and offer the product. Each company has unique underwriting guidelines, limits and deductibles. 


What is a Performance Bond?


A performance bond is a credit product that guarantees that the Principal (contractor) on the bond will complete the bonded contract according to the terms and conditions.


Performance Bonds are three party agreement between an Obligee (General Contractor or Owner), Principal (Subcontractor), and a Surety (Bond company). 


Subcontractor Default Insurance vs Performance Bonds - This chart compares Performance Bonds vs SDI. Its a blue and purple chart with a measuring tape and lumber in the background.


Claims Against a Subcontractor Default Insurance


Claims against an SDI policy are a major advantage. Once a Default occurs, a claim can be submitted and paid quickly to keep a project moving along. This is often referenced as a reason contractors choose SDI instead of performance bonds.


Another major benefit to SDI is that these policies can be crafted to cover additional costs such as indirect cost when a claim is made. No such benefit exists under performance bonds.


Subcontractor Default Insurance Deductibles


Because SDI is an insurance policy, there are deductibles that must be paid by the General Contractor. 


Each policy is different but it is common to have a deductible of $500,000 or more. This means that the General Contractor must have a loss that exceeds this amount before getting any benefit. 


Most of these policies also have Coinsurance provisions that can affect the reimbursement amount. 


These can be significant detractors from SDI as many contractors cannot afford to absorb one or more losses of this size.

Claims on Performance Bonds


When a contractor on a performance bond has been declared to be in Default and a claim is made against the performance bond, the bond company must investigate the claim to make sure it is valid.


Investigating a Default is time consuming and may hold up a project. This is one of the biggest disadvantages of a performance bond when compared to Subcontractor Default Insurance.


However, making sure the claim is valid is an important aspect of a performance bond as the Principal must reimburse the bond company for any paid loss under the indemnity agreement.


Some surety bond companies are now providing bond forms that make some cash available so that a project can continue while a claim is being investigated.


Performance Bonds are also limited to completing the contract. Indirect costs are not covered and the bond amount is the most a surety is required to pay to remedy the situation.


Performance Bond claims also carry another large downside from the perspective of the Obligee. The Surety on the bond gets to decide how to cure the default. 


This can include financing the existing Subcontractor, finding a replacement, taking over the project or just paying the Obligee. This lack of flexibility is a big disadvantage compared to SDI.


You can read all about Performance Bond Claims here.


Performance Bond Deductibles


Performance Bonds are not Insurance and are not subject to deductibles or coinsurance. Surety covers first dollar losses meaning the General Contractor or Construction Manager is reimbursed for the full loss subject to the bond limit. 


This is vital for contractors who cannot afford to absorb large SDI deductibles.


You can read all about Performance Bond claims here.

Cost of Subcontractor Default Insurance


SDI generally costs between 0.35 - 1.35% of the project amount. Sometimes carriers may provide an opportunity to return premium for good performances in these programs. However, SDI has other indirect costs such as pre-qualification expenses.


Performance Bond Costs


Performance Bond Cost is based on a Contractor's financial strength, the type of work being performed, and a bond company's rate filings. Generally, a performance bond will cost between 0.5% - 3% of the contract amount. You can read more details about Performance Bond Costs here.


Underwriting Subcontractor Default Insurance


Contractors purchasing SDI must go through underwriting with the SDI carrier. This typically involves providing Audited Financial statements, loss history, Subcontractor data, risk management plans and an application.


A second part of underwriting is the Subcontractor pre-qualification that must take place in order to use SDI with most Insurance companies. The General Contractor purchasing the SDI policy must either have an internal team prequalifying contractors in the program or use a third party vendor.


This additional cost and time is usually significant and should be carefully examined for any contractor considering the use of SDI.


Underwriting Performance Bonds


In order to obtain a performance bond, a contractor must be pre-qualified by a third party surety bond underwriter. Performance Bond underwriting is based on a Contractor's financial ability to complete the work, their capacity to complete the work and the underwriter’s analysis of the Contractor's overall character. These together are referred to as the 3Cs.


Unlike insurance performance bonds are written under the assumption of no losses. Therefore, a Surety bond underwriter would not provide a performance bond to a contractor unless they believed the contractor was qualified and capable of completing the contract.


Who Does Subcontractor Default Insurance Protect?


SDI is a product to protect General Contractors or Construction Managers. The policy does not typically protect other parties such as the project owner, Subcontractors, or material suppliers. 


It's important for project owners to understand that if the General Contractor has issues on the project, there is no protection in SDI to ensure completion. There is also no protection ensuring that the GC or CM will pay their bills and that the project will be free of mechanic's liens.


Likewise, Subcontractors and materials suppliers have no guarantee of getting paid by the GC having an SDI policy in place.


This is a product disadvantage when compared to performance bonds.

Who Does a Performance Bond Protect?

A performance bond protects the obligee on the bond. That could be the project owner or it could be the General Contractor if a Subcontractor is the Principal on the bond. 


However, at no additional cost, a performance bond can be combined with a Payment Bond. The payment bond ensures that subcontractors and material suppliers are paid on the project, giving them valuable protection. This also protects the project owner by ensuring the project will be free of mechanic's liens.


A Dual Obligee Rider may also be added to a performance bond. This rider extends the bond's benefits to another party such as a lender.


Who Can Purchase Subcontractor Default Insurance?


SDI is meant to be purchased by large General contractors and construction managers. Usually, a contractor needs to have $50 million or more in revenue to qualify. However, that is still on the small side with most SDI carriers and some require $150 million or more in Subcontractor expenses to qualify. 


Additionally, the contractor needs to have a very strong balance sheet to be able to pay the SDI premiums and absorb the large deductibles.


Who Can Purchase Performance Bonds?


Any contractor that can qualify can purchase a performance bond. Most contractors can qualify for a $1 million performance bond by just having good credit. Other programs such as the SBA Bond Guarantee Program, funds control and collateral help make almost any contractor be able to qualify.


History of Subcontractor Default Insurance 


SDI is a relatively new product over the last twenty years. This can be a benefit as more Insurance companies develop product offerings. A listing of some companies currently offering SDI is below:






Liberty Mutual


It can also be negative in that case law for SDI is still relatively new. 

History of Performance Bonds


Performance Bonds have been around for a very long time. Case law is well established on both a federal and state level. 


Unfortunately, surety has also become somewhat of a stale industry. Innovation and new products are lacking.


Summary of SDI vs. Performance Bonds 


Both Subcontractor Default Insurance and Performance Bonds have advantages and disadvantages. Many of the biggest and best contractors utilize both products. All parties should understand the use of the product before signing a construction contract that involves either one. 


Axcess Surety is a leading expert in performance bonds and construction. Contact us anytime for additional information.


Like many states, New York requires Auto Dealers to be licensed and to obtain a New York Auto Dealer Bond. Learn more about what these auto dealer bonds guarantee, what the cost and how to get one.


What Does a New York Auto Dealer Bond Guarantee?


A New York Auto Dealer Bond is a type of License Bond. The Auto Dealer Bond guarantees that the Dealer will comply with the requirements of Vehicle and Traffic Law section 415(6-b). These requirements include the agreement by the Auto Dealer to:



Who Are the Parties to a New York Motor Vehicle Dealer Bond?


Chart showing the parties to a New York Auto Dealer Bond including the Principal, Surety and Obligee. . This has orange and blue boxes with a New York license plate in the middle. A car lot in the background.


The Obligee is The State of New York. This is the party requiring and benefitting from the bond. The Principal is the Auto Dealer. This is the party making the promise The Surety is the third party bond company that is guaranteeing the Auto Dealer's compliance.


What Does a New York Auto Dealer Bond Cost? 


Most Auto Dealers can expect to pay 1% of the bonded amount per year. The premium is required to be paid each year the Motor Vehicle Dealer Bond is in place. Auto Dealers with credit challenges may be required to pay more. Preferred Rates are available for Auto Dealers who can provide strong financial statements.


Required Amounts of New York Motor Vehicle Dealer Bonds 


New York Auto Dealer Bond Requirements- This chart shows the amount of bond that each type of Dealer is required to post. A dealership is in the background.


The required surety bond amounts depend on the type and number of vehicles being sold. 


Used Vehicle Dealers that sold 50 or fewer vehicles in the previous calendar year need a bond in the amount of $20,000.


Used Vehicle Dealers that sold more than 50 vehicles in the previous calendar year need a bond in the amount of $100,000.


New Vehicle Dealers need a bond in the amount of $50,000.


Cancellation of a New York Auto Dealer Bond


The state of New York requires that the Surety give 60 days written notice to the

New York State Commissioner of Motor Vehicles prior to canceling an Auto Vehicle Dealer Bond. The Surety must also provide notice to the Commissioner when the bond is canceled or lapses. The notices must be sent via First Class Mail.


Obtaining a New York Auto Dealer Bond 


Obtaining a New York Auto Vehicle Dealer Bond is simple. Most Auto Dealers can obtain them here with a simple credit check. The bonds can then be issued and printed in minutes.


Green button for the instant purchase of new york auto dealer bonds for used vehicles, 51 vehicles or more.


Green button for the instant purchase of new york auto dealer bonds for used vehicles, 50 vehicles or less..


Green button for the instant purchase of new york auto dealer bonds for new vehicle dealers.


Bad Credit New York Auto Dealer Bonds


Auto Dealers with credit challenges can still obtain these bonds. Additional Information may be required but these bonds can still be obtained quickly in most cases.


Claims Against a New York Auto Dealer Bond


Should an Auto Dealer not comply with the laws and regulations set forth on the code, a claim may be made against the bond.


Recovery against this Bond may be made by a person, including the State, who obtains a judgment against the Principal for an act or omission on which the Bond is conditioned, if the act or omission occurred during the term of the Bond.


Examples of potential bond claims include:





Indemnity Required on New York Auto Dealer Bonds


If a claim is made against the Dealer Bond, the Surety will investigate the claim. If the claim is valid, the Surety must pay the claim. The Surety will then seek reimbursement from the Principal Auto Dealer and any other indemnitors. In this way, surety bonds differ from insurance.  Auto Dealers should understand this before purchasing a bond. More can be read about Indemnity here.


Penal Sum Limits Bond Liability 


Claims against a New York Auto Dealer Bond are limited to the bond's Penal Sum and do not stack liability. This means once the bond limit is reached, the Surety is not liable for any additional amounts regardless of the number of claims or the amount of claims.


Other Surety Bonds May be Required


Auto Dealers operating in New York may be required to provide additional bonds to the state. A common example is Notary Bonds. Many of the bonds can also be purchased instantly by visiting our New York Surety Bond Page.

New York Auto Dealer Bonds are required by law in order to maintain a dealer license. They are easy to get and affordable for most Auto Dealers. Contact Axcess Surety anytime to obtain these and other bonds. You can also visit our Surety Bond FAQ Page for many common questions about surety.


Getting contract bonds on Public Private Partnerships may be a challenge. Find out more about these projects and how to obtain contract bonds for them.


What is a Public Private Partnership?


A Public Private Partnership (also called PPP or P3) is a contractual agreement between one or more government entities and one or more private stakeholders to provide a public project and/or service.


From a construction perspective, a P3 often involves a long term contract, where a Private construction company builds a Public project using Private dollars. The Contractor pays for the project and collects a profit through the fees generated from the operations of the completed project.


P3s have been around for decades and are used by many countries around the world. In the United States, however, P3s are relatively new to most states and municipalities.


Many Types of P3s


There are many different types of P3 projects. They generally fall into two categories:


Greenfield Projects 

These are new construction projects. Some examples may include a new toll road, or the construction of a power plant.


Brownfield Projects 


These are existing structures that are being converted. Some examples may include the renovation of a treatment plant or treatment plant.


Contract Bond Challenges for Public Private Partnerships


P3s create challenges for contractors and surety bond companies. These include the following:


Long Term in Nature


One of the biggest challenges for contractors wanting to provide performance bonds and payment bonds on P3s projects is that they tend to be long term contracts. In many cases these contracts can last 20 years or more. 


Surety bond companies typically shy away from long term commitments as conditions change over time, even for the best contractors. 


Obtaining contract bonds on P3s will likely require that the maintenance guarantee is limited to a period of 5 years or less.




Financing P3 can be extremely complicated. There are endless ways and combinations that Public and private money may combine. Consider an example:


A toll road is being built. The contractor is responsible for construction costs and paid through future toll revenue on the road. This contractor will have to obtain financing for construction costs or fund the costs through their own cash and operations. 


This presents an extremely risking proposition for the contractor and their surety bond company. Unlike most construction projects, the contractor must finish the entire project before collecting revenue. 


Secondly, the toll revenues may not meet Projections. Drivers may find alternative routes, carpool, or find other ways to avoid the tolls. In fact, revenue Projections on P3S are routinely over optimistic.


Non Payment Risk to Subcontractors


Subcontractors need to be very aware of the financing risks associated with P3s. Subcontractors may be unaware that they are sharing in the General Contractor's risk. Because the General may not be getting Progress payments, they run a very high risk of not being able to pay subcontractors and suppliers.


Subcontractors and Material Suppliers on P3 projects should make sure the General Contractor has a Payment Bond on the project. They should also not let the General get behind on payments. An even better practice would be to have the General Contractor and lender set aside and escrow project monies.


Strategies for Getting P3 Contract Surety Bonds


There are a number of ways to improve a contractor’s chances of getting their bond company to support contract bonds on a Public Private Partnership.


Separate the Construction Obligation


As mentioned earlier, surety bond companies do not like long term commitments. Contractors should work to separate the construction phase of the project from the operations phase. The performance bond, payment bond, and Maintenance Bond can cover the construction contract and then the operational contract takes over once construction is complete.


Be Prepared


This sounds simple but contract bond underwriters view these projects as very risky. Make sure you know the risks and pitfalls and have a plan to overcome them. This should include in-depth knowledge of how the P3 works, a commitment for financing, Projections and stress testing for project revenues, and a plan for if things do not go as expected.


Maintain a Strong Balance Sheet


Because P3 projects are risky, contract bond companies will want contractors to have more than enough cash, working capital and net worth than required for most contract bonds. They will likely not support these bonds for contractors that are "stretch cases" or overextended.


Work With the Right Surety


Many smaller surety companies are unfamiliar and uncomfortable with P3 projects at this point. Contractors looking at P3 projects likely need to be working with a top 5 surety company who has familiarity and expertise to support P3 projects.


P3 can be extremely risky and many fail. However, the U.S. is likely to see the number of P3s increase in the coming years and contractors and their bond companies need to be prepared to consider these projects. Axcess Surety is an expert in providing all types of bonds. Contact us anytime or visit our Surety Bond FAQ page.


Private Equity continues to make significant investments in the construction industry both in the U.S. and globally. These investments can be great for the industry, but they also create challenges for companies needing Contract Surety Bonds such as Performance Bonds, Payment Bonds and Bid Bonds. Learn more about what contract bond underwriters look for in these transactions and how to make obtaining these bonds easier.


What is Private Equity?


Private Equity is an investment in a company or companies in exchange for ownership in the company. These investments are often made by an investment group or fund on behalf of a group of owners. You can read more about private equity here.


Company Management


Contract bond underwriters will be very interested in how the company is managed after the transaction takes place. Will the former owners and management team stay around to run the company or will the PE firm install new managers? Bond underwriters typically favor keeping key people on board for a period of time.


If new management is put in place, do they have experience running this type of company? Construction is a challenging industry, even for the best managers. Bond underwriters will be hesitant to support company management without deep industry experience. 


Even if the top management changes, keeping experienced estimators, project managers, superintendents, and accounting staff is key to a successful transition and support from a bond company.


Indemnity Package


One of the biggest challenges for getting Contract Surety Bonds after a private equity investment is the indemnity Package. Surety Bonds are written on The Principle of Indemnity and are a credit product. This means, the company and or owners need the financial ability to reimburse the contract bond company if there is a loss.


The problem for contractors purchased by private equity is that the new structure often makes this difficult. In many cases, the construction company is rolled up under the parent firm. The parent firm will often refuse to indemnity, creating a challenge for the bond company.


Another possibility is that the PE parent company pulls out all the cash, creating a construction company with negative net worth. Again, without indemnity of the parent, this creates a challenging situation for the contract bond company.


Finally, the new management may have no ownership in the construction company. Therefore, they will usually not provide their personal indemnity. This creates a situation where the bond company struggles to get any meaningful indemnity Package.


Contract Bond Solutions for Private Equity




One option for contractors with private equity ownership to obtain bonding is to post collateral. Because the PE firms and owners may be unwilling to indemnity, collateral gives the contract bond company some security. The amount of collateral necessary depends on the bond company but 20% of the requested Surety program is standard.


Parental Company Indemnity


Getting indemnity of the parental PE firm can be a challenge and take time. However, once they understand the reasoning, it is often doable. First of all, this is the cheapest option. Getting parental company indemnity allows the contractor to get better bond rates and terms. Additionally, the company avoids the extra costs associated with collateral.


Focus on Cash Flow


Although many bond companies focus on working capital and net worth, some put an emphasis on Cash Flow. In cases where the company has solid cash flow and profitability, this can be a great option for obtaining bonding.


Other Underwriting Considerations


Prospectus of Private Equity Firm


Contract bond underwriters may be very interested in the prospectus and history of the PE firm. Firms that intend to hold and operate companies for long periods of time will find it easier to secure Surety bond credit. Alternatively, a PE firm with a history of flipping companies quickly may find it more difficult to get Surety.




Contract Bond Companies will want to understand the distributions required by the PE firm. It is not uncommon for all profit to be distributed back to the PE group. However, distributing all profits will lead back to discussions on indemnity.


Private Equity transactions can create challenges for contractors needing Construction Surety Bonds. However, Axcess Surety had the expertise and bond markets to place such risks. Contact our experts anytime. You can also visit our FAQ Page for more information on Surety Bonds.


Underbillings and Overbillings are important to all contractors and contract Surety Bond underwriters. Learn more about what they are and what underwriters look for in determining a contractor’s bond capacity.


Percentage of Completion Accounting


Most contractors should be using the Percentage of Completion (POC) method of accounting. This is the most accurate method of construction accounting and creates both Underbillings and Overbillings. You can read more about the Different types of financial statements here.


What is an Underbilling?


Underbillings are an industry name for Costs In Excess of Billings on Uncompleted Contracts. Simply put, they are revenue that a contractor has theoretically earned but not yet billed. For example, if a project is 50% complete but a contractor has only billed for 40%, the project is 10% underbilled.


Underbillings show up on a contractor’s Work in Progress Report. This report should tie back to a Contractor's balance sheet where Underbillings appear as a current asset. Underbillings are a Current Asset because in theory, they should be revenue that the contractor can bill for and collect in the future.


Many contract surety bond companies base a contractor’s bond capacity as a multiple of working capital. Working Capital is calculated by taking Current Assets and subtracting Current Liabilities.


In theory, because it's a Current Asset, more underbillings should increase working capital and therefore bond capacity. However, this is almost never the case.


Underbillings and Bond Companies 


Contract Surety Bond companies are skeptical of underbillings because they often turn into losses. From a practical standpoint, underbillings often appear when there is a project dispute, a poor estimate, or bad billing practices.




Underbillings often happen when there is a dispute. The contractor submits a change order for work that has been done but cannot bill for it. This creates an underbilling. Contractors should ALWAYS have a signed change order in hand before doing work outside the contract.


For this reason, contract bond underwriters will closely monitor underbillings on a particular project. If the Underbilling remains for more than a billing cycle or two, most bond underwriters will assume it's a loss and remove it from their analysis.


Poor Estimate 


Underbillings can also occur when a project was estimated improperly. For example a contractor may realize they have significantly more coats but unable to bill for those costs under the contract.


Bad Billing Practices


Underbillings also show up when a contractor has bad billing practices. If a contractor has earned revenue that is not in dispute, the contractor should be billing for it. 


Constant underbillings are a sign that a contractor has poor accounting systems in place and are a major red flag. Contractors often create Bonds claims and go bankrupt when they have bad systems in place.


When are Underbillings Acceptable?


There are situations when Underbillings are justified. One example is when a contractor is not allowed to bill for material or equipment until it is installed. 


Certain trades also tend to have more underbillings. However, these underbillings should generally be small and Billed quickly.


What are Overbillings?


Overbillings are an industry term for Billings in Excess of Costs on Uncompleted Contracts. Simply put, these are revenues that a contractor has Billed for, but that they have not yet earned. For example, if a contract is 50% complete and the contractor has billed for 60%, the project is 10% overbilled.


Overbillings also show up on a contractor’s Work In Progress Report and should tie back to the Contractor's balance sheet as a Current Liability. Overbillings are a Current Liability because the contractor has billed for work they have not done. This will lead to a future cost that they cannot bill for.


Overbillings and Bond Companies


Most contract surety bond companies view some Overbilling as a positive. It is a best practice to stay slightly ahead of Billings on a project. In fact, an accepted industry practice is to "front load" a contract to cover mobilization, insurance and performance bond costs, etc. 


Overbillings can be a problem for contractors though. Bond underwriters will want to make sure that a contractor has enough cash and account receivables to offset Overbillings. This is because the contractor will have a cash outflow later in the project. Not having enough cash and receivables to offset Overbillings is a sign of cash flow troubles to come.


Job Borrow


While being slightly overbilled on a project is acceptable, job borrow is not. Job borrow occurs when a contractor uses Billings from one project to cash flow another project. 


Pure Job Borrow occurs when a project is overbilled by more than the project's remaining Gross profit. Job Borrow is often a sign of cash flow issues to contract bond underwriters and other lenders.


Every contractor should Understand Underbillings and Overbillings. Accurate accounting and billing guidelines practices is vital to the success of any construction company. These practices are also essential to contractors needing contract bonds such as bid bonds, performance bonds and payment bonds


Contact Axcess Surety anytime for best practices and help with all bond needs.



The price of construction materials is soaring. Inflation is expected to remain high and oil prices are hitting record highs. Price Escalations are part of the current construction environment but how do these increases affect contractors and their contract bonds?


Bid Bonds and Price Escalations


Bid Bonds are used to pre-qualify bidders and ensure that they honor their bid price. So how do contractors protect themselves when their costs may change significantly between bid day and the time to build the project? 


Condition the Bid


One option is to condition the bid. The added condition(s) can be almost anything. However, in the case of rapidly changing prices, consider using an Escalation Clause. 


An Escalation clause ties material, fuel or other items to a specific price or index. Changes above or below the index create increases or decreases to the contract. 


Fuel Escalation Clauses are common on many state's DOT projects but Private Owners or General Contractors may be less receptive.


Conditioning a bid might get the bid thrown out and the bidder be considered "non-responsive". However, it's better to have your bid thrown out than take a project and lose money.


Pad the Bid


The more uncertain material prices are, the more extra money a contractor should be adding to their bid. The extra money acts as a cushion for price increases. Unfortunately, many contractors are worried about losing out on the project and do not add nearly enough extra money to cover their risk.


Performance Bonds and Price Escalations


Performance Bonds are required on projects to guarantee a price. Unfortunately, performance bonds could cause big problems for contractors when prices are rising quickly. Failure to honor the contract price could cause an Obligee to make a claim on the performance bond.


Fortunately, there are steps to prevent these claims and maintain profitable projects. 


Buy and Store Project Materials 


Contractors should consider purchasing and storing project material at the time of award if they can get it. This is especially true for items that are difficult to get such as roofing materials. 


Get Suppliers to Commit


Ask your suppliers to lock in prices. Some will and others will not, but you contractors should try. 


Purchase Futures


Contractors that use a lot of fuel such as heavy contractors should purchase fuel futures. There is a risk of being locked into higher prices as well, but having certainty for your contracts is worth the tradeoff.


Insert Price Escalation Clauses


When possible, include price Escalation clauses in your contracts as discussed above. Some obligees may be unfamiliar with these clauses, but will likely see them more.


Get Subcontractor and Supplier Bonds


One way to mitigate prices is to shift the risk downstream. This can be accomplished by getting performance bonds from your subcontractors and shifting the cost burden to them.


Supply Bonds from Suppliers would also be ideal. These bonds guarantee the delivery of material or equipment at a specified price. Unfortunately, many suppliers are unwilling to provide these in the current environment.


What About Price Escalations on Existing Contracts?


There are some things a contractor can do if they are already under contract and have performance and payment bonds outstanding.




The best case in these matters is almost always negotiating with the Obligee. Be ready to explain why they should agree to give you relief. They have the ultimate backing of the performance bond but making a claim could cause delays and project disruptions.


Force Majeure Clauses


Force Majeure clauses are common in contracts to protect parties from unpredictable events such as war, natural disasters, etc. These clauses could be widely interpreted to cover a variety of issues. 


However, the remedy for these clauses is often just more time. This may or may not help contractors deal with increasing prices.


Equitable Adjustment


If all else fails, you can ask for Equitable Adjustment. Some courts have held that significant material costs could trigger unfairness and contractors may be entitled to relief on Public contracts.


However, not all courts agree with this. Even if they do, Court costs and attorney fees may quickly deplete any relief that may be granted. This strategy should be considered a last effort and not done without consulting a qualified construction attorney.


Rapidly rising material and fuel prices pose a significant risk to contractors and their surety bond companies. Contractors should take all the precautions they can to reduce their risk. 

Obtaining contract surety bonds can be significantly impacted by debt. Learn how surety bond companies look at debt and how you can maximize your bond capacity.


What is Debt?


Debt is an obligation owed to another party. From a financial standpoint, it is money due to another company or person. Debt is called "Liabilities" on a balance sheet. Debt is a significant underwriting factor for Contract Surety Bond companies. 


Short Term Debt vs. Long Term Debt


It is important to understand the difference between short term debt and long term debt. Obligations that are due within a 12 month time period are referred to as short term debt or Current Liabilities. 


Current Liabilities often include items such as Accounts Payables, Lines of Credit, and the Current Portion of Long Term Debt.


Obligations that are due in longer than 12 months are long term debt or Long Term Liabilities. 


Long Term Liabilities often include amortized loans such as real estate, equipment, and vehicle loans. 


Interest Bearing vs. Non-Interest Bearing Debt


Another important factor that contract bond underwriters  look at is whether debts are interest Bearing. 


Interest Bearing Debt is a liability that carries an interest payment. Debt such as bank debt is usually Interest bearing.


Interest Bearing Debt is of particular interest to surety bond companies. Interest payments create an additional cost for a company. That means the company needs additional profit to cover interest payments. 


Interest Bearing Debt is also difficult to get rid of if the company gets into financial difficulties. Therefore, contract bond underwriters want to make sure that the company can handle the current interest payments and that the interest Bearing Debt to Equity is manageable.


Non Interest Bearing Debt or operating debt is a liability that typically does not carry interest payments. An example would be Account Payables. 


Contract Bond underwriters like to make sure that non Interest Bearing Debt is in line with cash and receivables. For example, a company should have more cash plus account receivables than account Payables.


Debt and Working Capital


Working Capital is the primary factor that most contract surety bond companies use to determine a company's bond capacity. Working Capital is a company's current assets minus its current liabilities. This gives an indication of a company's ability to meet its short term obligations.


Working Capital - This green box shows the calculation for working capital. The background is a construction hardhat and level.


Debt impacts Working Capital. Short term debt including the current portion of long term debt directly decreases a company's working capital. Companies should be aware of this as they increase their borrowing. Bank line of Credit usage, equipment purchases and other borrowing reduces working capital, which in turn, reduces a company's bond capacity.


Debt and Equity


Another important financial metric for contract surety bond underwriters is Equity or Net Worth. Equity is a company's Total Assets minus its Total Liabilities. 


Equity Calculation - this green text box shows the calculation for a company's equity. The background is construction blueprints.


As you can see by the equation above, additional debt or Liabilities decrease a company's equity. This also has a negative effect on their surety bond capacity.


Contract Surety Bond companies are especially interested in a company's Interest Bearing Debt to Equity. The lower the ratio, the better.


Stockholder Debt and Contract Bonds


Company stockholders often loan money to the company. This is especially true in privately held businesses. These transactions show up on a company's Balance Sheet as a liability called "Stockholder Note Payable."


Different contract bond companies view this debt in different ways. Some companies view these transactions negatively. The thought process is that the shareholders should properly capitalize the company and that these monies should not be a loan.


Other contract bond companies have no issue with this debt. These bond companies treat it as any other loan that increases Liabilities and decreases equity. 


Subordinating Debt to Increase Bonding


One easy way to improve contract bond capacity if a company has stockholder Debt is to subordinate that debt to the surety bond company. This means the stockholder(s) with the loan(s) from the company agree not to pay back those loans without permission from the surety bond company.


This process is handled through the signing of a Subordination Agreement with the Surety Bond company. Once this is accomplished, most contract bond companies will remove that debt from their analysis and add it to Equity. This can significantly improve bond capacity for a company with Shareholder debt.


Personal Debt and Bonding


Every contract bond company looks at the personal debt of shareholders differently. Some care very little about the personal statements but most care a lot, especially for small and mid sized, private companies.


The reason bond underwriters scrutinize personal debts is because they want to know what a Shareholder is going to have to distribute from the company to cover their personal obligations.


A Shareholder with lots of personal debt has less flexibility and will put more pressure on company earnings. They will likely need to take distributions even if the company does not perform. For this reason, contract bond companies prefer Stockholders to have manageable personal debt or offsetting personal cash and liquid assets.


Tips for Maximizing Contract Bond Capacity with Debt


Most companies and shareholders have some debt. If a company needs contract bonds such as Performance Bonds, Payment Bonds, and Bid Bonds, the key is managing that debt to help you maximize your bond capacity.


Do Not Pay Down Long Term Debt


Be careful before paying off long term debt. It sounds counter intuitive, but this is a mistake I see many companies make. They take cash which is a Current Asset and pay down a Long Term Liability


This significantly decreases Working Capital and bond capacity. Many companies are surprised that paying down debt hurts them but this will. If a company really wants to take this strategy, they need to make sure they are with a surety bond company who values net worth over working capital.


Refinance Short Term Debt


Many companies like to use their bank lines of credit for operating needs. Unfortunately, that borrowing is considered a Current Liability and will directly decrease bond capacity. 


If a company needs more contract bond capacity, they should go to their lender and discuss refinancing this debt into a term loan. By "terming" this debt out, a significant portion is then moved to a Long Term Liability. The result is a boost to working capital and therefore bond capacity.


Borrow Money for Bond Capacity


Another method to boost contract bond capacity is to actually increase debt. A company would go to their lender and use their fixed assets to take out a term loan and inject the cash into the company. 


This strategy works because it adds cash which is a current asset, but most of the debt is a long term liability. The result is a boost in working capital and contract bond capacity. 


However, this strategy should always be discussed with your bond broker and surety bond company first. Not every surety bond company views this as a positive.


Strategically Use the Calendar 


This is one of the easier and often unused methods for helping companies with Bonding in the short term. Contract Bond companies look at balance sheets which are a snapshot in time. 


For companies with high debt ratios and heavy borrowings on their lines of credit, consider paying down the line at month's end. Even if the company borrows the money back the next day on the 1st, the month end balance sheet will show less debt and better credit ratios.


Debt is a reality for many companies. It is a very important factor for all contract surety bond companies and managing it the right way can be key to getting bonds. Axcess Surety works with companies in all situations and can provide the best advice to maximize your bond capacity. Contact us anytime. You may also visit our Surety Bond FAQs page here.


The City of Garland Texas requires a General Repair Bond before Right of Way work can begin. Find out what this bond is, how to get one and what they cost. 


What is a Garland Texas General Repair Bond?


A Garland Texas General Repair Bond is a type of License and Permit Surety Bond. The City Right of Way Management Department requires this bond along with a Contractor Registration Form and a Utility Registration Form before any right of way work can begin. 


Parties to a City of Garland General Repair Bond


The Obligee is the City of Garland, Texas. This is who is requiring the bond and benefiting from the guarantee. The Contractor performing the work is the Principal on the bond. The Principal is the party making the promise. The Surety is the third party bond company that is guaranteeing the Principal’s fulfillment of the bond obligations. 


This shows the three way relationship between a contractor, surety and city of Garland Texas on a Garland Texas General Repair Bond. The background is a Texas flag and flowers.


What Does a Garland General Repair Bond Guarantee?


The bond guarantees that if a contractor doing work to the City’s right of ways, or easements does damage to streets, roads, curbs, or utilities, they will fix the damages. If the contractor does not fix the damages, the City can make a claim against the bond to the bond company. The bond also guarantees that the contractor maintain the work for a period of one year. 

The bond also states that the contractor must agree to abide by the city's specifications and codes for all the repairs made.


What Does a Garland General Repair Bond Cost?


Garland General Repair Bonds Cost $100 each for most contractors. These bonds are very affordable protection for the City. 


How Do You Get a Garland General Repair Bond? 


Garland General Repair Bonds are very simple to obtain and can be purchased in seconds. These bonds are instant issue and can be purchased by clicking the button below. 



Indemnity is Required on Garland General Repair Bonds


Like all surety bonds, these bonds require the Principal contractor to indemnify the surety bond company. This means that if the bond company suffers a loss, the contractor and any indemnitors agree to reimburse the bond company. This is a major difference between surety bonds and insurance. You can read more about indemnity here


City of Garland, Texas Bond Form


Contractors can get a copy of the City’s bond form here


Additional Information


Garland, Texas General Repair Bonds are easy to obtain and can be obtained instantly. Additional information can be found by contacting the City of Garland Department of Engineering. Additionally, you can read our Surety Bond FAQ Page or contact our bond experts at Axcess Surety anytime. 


Surety Bonds provide valuable protection, but it is important to Verify a bond and make sure it is valid. Learn more about how to do this and why you should.


Why Verify a Surety Bond?


Unfortunately, fraud exists in most businesses including Surety. Having a fraudulent surety bond means that there may be no protection available. It could also mean that a contractor pays for a surety bond that will not be accepted by an Obligee and the contractor may be stuck paying for another bond. 


How to Verify a Surety Bond


There are both easy and more detailed steps that all entities can take to protect themselves from surety bond fraud. 


Corporate Surety or Individual Surety?


A corporate surety bond company is an entity licensed in one or more states to conduct the business of surety. These corporations are required to have liquid assets backing their obligations and heavily regulated to make sure they can back up their guarantees and pay their claims. 


Individual surety bond companies are individuals who pledge assets as a surety. Although individual sureties can be accepted on Federal projects, these bonds should be avoided. This industry has been historically filled with fraud. In many cases, individual sureties do not have the assets to fulfill their obligations.

Individual Sureties are also not an acceptable surety for most contract requirements. Contractors may not discover this until they have already paid for the bond. It is best to steer clear of these companies. 


Check the Treasury Listing


All corporate surety bond companies that are allowed to do business with the United States Federal Government are listed on the U.S Treasury Department 570 Circular. This is also referred to in the industry as a “T-Listing.” Each company will be listed on the 570 Circular along with the largest bond amount the government will accept from each surety. Most GC contracts also require that a Subcontract Bond be listed on the 570 Circular as well. You can find the listing here. 


Check the Surety Bond Company’s Rating


Most contracts require that a corporate surety bond company have a rating of A- or better by an approved rating service. A very popular service is A.M. Best. A.M. Best rates the surety bond companies by their ability to meet their claims obligations. Even if it is not required by a contract, a contractor should do business with a surety company with an A- rating or better to ensure they are getting a company that will be able to meet their obligation. Most contracts will require the contractor to replace a bond if the surety company goes out of business before the obligation is complete. Although this is not common, it could cause a contractor to pay for a bond twice. You can check a surety bond company’s A.M. Best rating here


Make Sure the Surety Bond is Sealed


Every valid surety bond must have a seal from the bond company to be valid. In the past, this was an embossed seal on the bond. However, technology has made this more difficult as many surety bond companies now have electronic seals that are completely valid.


Whether a seal is embossed or electronic, the important thing to check is that the company on the seal is also one of the companies listed on the power of attorney that should accompany the bond(s).


Check the Power of Attorney


A Power of Attorney is a piece of paper that should be attached to every surety bond. In surety a Power of Attorney (POA) gives authority for certain individuals to sign bond on behalf of the surety bond company. Each Power of Attorney also lists the maximum amount those individuals can commit the surety bond company to. It is very common for a Power of Attorney to be “unlimited’. 


The important thing to check when verifying a Power of Attorney is that the person signing the bond on behalf of the surety is listed on the POA and that the bond does not exceed the stated limit. Fraud can happen when an unauthorized person gets ahold of a surety bond company’s seal and issues bonds without being on the POA. 


Contact the Surety


One of the best ways to protect against agent fraud is to contact the surety company who issued the bond. They will likely ask the bond number and bond amount. Ask them to verify that the bond is both valid and active. Many surety bond companies allow you to submit this request through their websites to make the process easier. 


Contacting the Surety allows somebody to skip the steps of verifying a POA but the Principal or contractor still needs to check the T-Listing and financial rating to make sure the bond company is in compliance. 

Verifying a surety bond may seem like a hassle but Contractors, Owners, Lenders and Bond Brokers should all take this process seriously. Surety Bonds are necessary to protect these parties but they do not work when fraud is involved. Contact Axcess anytime with questions or help in verifying your surety bond.

ESOPs are a great way for companies to transfer ownership but they can create challenges for companies that need Contract Surety Bonds. Learn about ESOPs and how to make it easier to obtain bid bonds, performance bonds, and payment bonds


What is an ESOP?


An ESOP or Employee Stock Ownership Plan is a qualified retirement plan that invests in the stock of a particular company. 


When a company decides to sell to an ESOP, there are a few steps that take place:


  1. An ESOP Trust is set up
  2. The Trust purchases the company stock through borrowing from a lender, former shareholders, or both in many cases.
  3. Shares are allocated to employees as they are earned.
  4. Shares are repurchased from employees when they retire or employment ceases.


ESOP Structure - This graphic shows how an ESOP works with the selling shareholders, the company, the lender and employees and the ESOP Trust



What are Advantages of an ESOP




A huge advantage of an ESOP is that they are not required to pay Federal income taxes to the extent of the ESOP. For example, a company that is a 100% ESOP pays no Federal income tax. This is a huge advantage to any for profit company. In essence, the amount of money a company would have paid in taxes can be used to buy out the former ownership instead.


A company may also be partially owned by an ESOP. A company that is only 50% ESOP owned would only receive the tax benefits on 50% of their revenue.


A Buying Market for the Company


Some privately owned companies can be difficult to sell for fair market value. An example may be a General Contracting business that has many intangible assets and unpredictable cash flow. These companies may have difficulty finding a buyer. 


Additionally an owner may want to sell the company to an existing employee or employees, but they may not have the financial means or desire to purchase the company.


An ESOP can be a great way to create a market. By selling to existing employees, an owner can get fair value and take care of their employees at the same time. The employees also do not have to borrow money or have the financial burden of trying to purchase the stock individually.


Employee Retention and Recruiting 


ESOP companies often report better employee retention than other companies. It can also help recruit new employees. Once employees realize the value of the stock they are getting for free, it is easy to see why this may be the case.


Disadvantages of ESOPs


Additional Costs


Costs can be a disadvantage for ESOP companies. Because ESOPs are a qualified retirement plan, they require a higher level of compliance and responsibility. ESOPs must appoint trustees and most banks and surety bond companies require outside trustees. 


Companies must also get audited financial statements which carry a greater cost and time commitment than a company may be accustomed to.


May Provide a Below Market Purchase Price


For companies in very desirable industries, owner(s) may receive less by selling to an ESOP. This is especially true under current market conditions where capital is abundant and inexpensive.


You can learn more about ESOPs at NCEO and ESCA.


How to Get Surety Bonds for an ESOP 


Have Owner Financing


As mentioned earlier, ESOPs can use outside borrowing, owner financing, or a combination of both. Surety bond companies prefer as much owner financing as possible. 


Selling shareholders can carry a seller note. By Subordinating this debt to the bond company, the company can significantly improve it's surety bond capacity. Selling owners can also benefit because they usually get above market interest on these seller notes.


On the other hand, bank debt creates problems for Surety bond companies. They do not want to be in second position to the bank for the company's assets.


Have Realistic Projections


Both lenders and surety bond companies will want to see Projections for the ESOP and its repayment schedule. Unfortunately, these Projections are often unrealistic. Surety bond underwriters appreciate numbers that match the company's historical performance. 


Additionally, a company should stress test their Projections to show how they will meet their obligations if things do not go as planned.


Have a Plan for Owner Indemnity


One challenge for ESOPs and Bonding is Indemnity. Generally, bond companies like to have Indemnity on major owners and key people. This is usually difficult or impossible at an ESOP when key management may have very little ownership.


In some cases, the surety bond company may want former owners to Indemnity until some of the ESOP debt can be repaid. This is acceptable for some former owners. Others may refuse entirely and negotiating or finding a new bond company may be necessary.


Make Sure You are Working with ESOP Experts


Although they do not want to lose a client, most local contract surety bond underwriters are inexperienced with ESOPs and their company may be as well. ESOPs are complicated, and working with the wrong underwriter is common. 


It's also a major reason for complications. Ask your bond broker and bond underwriters about their experience and philosophy on ESOPs. It may save you from delays and problems. 


Get Your Bond Broker Involved Early


A major mistake we often see is that the terms and structure has been set up without getting the bond broker involved. This can be a big mistake. 


Many companies find out too late that their structure prevents them from getting contract surety bonds. At that point, it is expensive to change the terms of the deal. Make sure you get all your advisors to collaborate early in the process.


ESOPs can be a great strategy for owners, employees, and companies. They provide a much needed way to boost retirement savings in the U.S. and seem to be supported by the most politicians. As such, we believe ESOP transactions will continue to increase. 


Make sure if you are considering an ESOP, you contact an expert like Axcess Surety. You can contact us anytime or visit our Surety Bond FAQ page.


Contract Surety Bonds are underwritten on the "3Cs". What does that mean and how understanding the "3Cs" can make it easier for contractors to obtain construction surety bonds.


What Are the 3Cs of Contract Surety Bond Underwriting?


The 3Cs are an acronym for Character, Credit, and Capacity. Together they make up the three distinct categories that contract Surety bond underwriters look at before issuing bonds such as bid bonds, Performance Bonds and payment bonds.


This chart shows three columns with "character", "credit", and "capacity". The columns list what information surety bond companies ask for when underwriting contract bonds. The back ground is a black and white construction site. The columns are blue and yellow.


Character in Surety Bond Underwriting 


Character in bond underwriting refers to a contractor doing what they say they are going to do. Many underwriters will tell you that Character is the most important aspect of the 3Cs. After all, a bond underwriter wants to know that a contractor will complete their obligation and fulfill their commitment to reimburse the bond company if they cannot. No amount of money can make up for bad character.


Character may also be the most difficult of the 3Cs to underwrite. Surety bond underwriters judge Character in a number of ways. They may contact contractors, owners and suppliers the contractor has worked with in the past. The underwriter is trying to see how the contractor deals with others to get an indication on how they may deal with the Surety and the parties on projects they may bond.


Another way that surety bond companies underwrite character is by having annual meetings with the Contractor's owners and key people. An Underwriting meeting is important for a Surety to hear about a company's background and plans. It also gives the Surety a chance to set expectations. A contractor that upholds its commitments is considered to have good character while the opposite can also be true.


An example of this would be if a contractor commits to providing timely financial statements or obtaining bonds from Subcontractors, and does not do so, it could be looked at negatively by a surety bond company.


Credit in Surety Bond Underwriting


Credit in surety bond underwriting refers to company and/or company owner(s) financial qualifications. Surety bond companies look at many items to assess a company's credit. 


Company Financial Statements 


Contract Surety Bond companies usually want to see the company's most recent three years of financial statements. Depending on the size of bond Capacity desired, these statements usually need to be CPA prepared. The Surety is looking for statements that include a balance sheet, income statement, statement of cash flows, work in progress schedule, completed contract schedule, and notes to the financial statements. Additionally, the bond company will want to see an aging of accounts receivables. You can read more about financial statements for Surety bonds here.


Balance Sheet 


The Surety bond company is very interested in the company's balance sheet. They want to see how much liquidity a company has.This is often measured through a company's working capital. They are also very interested in a company's net worth. A Surety wants to see how much debt a contractor has and normally wants to see debt much less than 4 to 1 when measured against net worth. 


Other things Bond underwriters look for on a balance sheet are a company's fixed assets and their depreciation, inventory and related party transactions.


Finally, a balance sheet shows the Surety company how much money a company has retained.


Income Statement 


A Contractor's income statement shows the Surety underwriter if a contractor is profitable. Underwriters are also interested in the company's general and administrative expenses (also referred to overhead). Knowing a Contractor's historical overhead can give insight into how much work a contractor will need to obtain to be profitable in the future.


Work in Progress and Completed Contract Schedule 


A Contractor's job schedules are another valuable tool for Surety bond companies to underwrite a Contractor's credit. Underwriters look at these schedules for trends. Do projects maintain the expected gross profit or do they tend to fade? An underwriter can also see if a project is headed for problems and if a contractor needs more work.


Aging of Account Receivables 


Surety underwriters look at aging to determine if Receivables are collectible and if there are any potential problems. Old Receivables are harder to collect and surety companies exclude Receivables 90 days and older from their analysis. The exception to this rule is retainage but contractors need to be able to separate that in their reports.


Personal Financial Statements 


Another valuable tool for underwriting credit are personal financial statements on company owner(s). These give insights into what resources may be available to the contractor if the business needs it. 


Personal Financial Statements also give bond underwriters insight into what the owner(s) need to take out of the business to cover personal expenses. The larger the Personal expenses, the more pressure on the business to generate profits to cover those expenses.


Credit Reports


Surety Bond companies also use credit reports to determine a Contractor's bond credit. These reports are mostly used to see if there are liens, Judgments, or litigation that impact the credit decision.


Capacity in Surety Bond Underwriting 


Capacity in surety bond underwriting refers to a Contractor's ability to handle a certain workload. To evaluate Capacity, a Surety company commonly looks at the following:




A Contractor's Equipment and equipment policy is a key consideration. Does the contractor have the necessary equipment for their workload? Will they have to buy or rent additional equipment? All of these factors into how much work a contractor can handle.




Another consideration for Capacity is the Contractor's people and their experience. Do they have enough supervision to handle a certain workload? Do those people have experience on large projects or in a specialized sector?


Internal Controls


Internal controls and reporting are one of the most important and often overlooked factors in underwriting capacity. Managing bigger workloads involves more cash management. Surety underwriters want to make sure Contractors have sophisticated systems and practices in place to track cash, project performance and financial reporting. Contractor's without such systems may have their capacity limited.


Subcontractor Management


Subcontractor default poses a major risk for most contractors. The bigger workload, the bigger the risk. Surety underwriters want to make sure that Contractors have a Subcontractor management plan. Usually this includes getting Subcontractor bonds or Subcontractor Default Insurance for some of their Subcontractors.


There are even more details that go into the 3Cs of Contract Surety Bond Underwriting. However, having an understanding of what bond companies look for can help contractors make themselves more bondable. You can also view our surety bond FAQs to learn more. Contact us anytime

Frequently Asked Questions about Surety Bonds are Answered Below:


What is a Surety Bond?


A surety bond is a three party guarantee between a Principal (the party making the guarantee) the Obligee (party receiving the guarantee) and a Surety (the third party bond company backing the Principal’s guarantee). Surety Bonds fall into two major categories and several sub categories. These include Contract Surety Bonds and Commercial Surety Bonds. 


A Surety Bond Guarantee - This shows the three way relationship between a Surety, Obligee and Principal on a Surety bond.


Contract Bonds


Contract Bonds guarantee contracts. Usually these are construction contracts but also include service contracts such as Janitorial Bonds, Security Contracts, etc.


Contract Bonds include Bid Bonds, Performance Bonds, Payment Bonds, Maintenance Bonds, Supply Bonds, and Developer Bonds. However, Developer Bonds can also be considered Commercial Surety.


Contract Bonds are mandated on all Federal projects over $150,000 through the Federal Miller Act. Most states and municipalities have enacted similar requirements when public funds are involved. Private Owners and General Contractors also frequently require these bonds as a way to manage their project risk.


Commercial Bonds


Commercial Surety Bonds are the second major category of Surety Bonds. Commercial Surety Bonds encompasses many sub categories. These include License and Permit Bonds, Fidelity Bonds, Court Bonds, Public Official Bonds and Miscellaneous Bonds.



How Do Surety Bonds Differ From Insurance?


Despite what you may think or read, Surety bonds are not insurance. In fact they are quite different products. 


Surety is a credit product. It is more closely related to banking than insurance. A company or individual must qualify financially to get a Surety bond. Additionally, they must agree to reimburse a Surety bond company if a loss occurs under the indemnity agreement.


Surety also assumes no losses and is priced accordingly. Surety Bonds would be unaffordable if they were priced like insurance policies. 


Alternatively, property and casualty insurance is not based on financial underwriting. It is offered and priced according to a company's industry, the expected losses for that industry, and the company's own loss history. Insurance pricing includes a certain amount of expected losses.


If a loss does occur, a company or individual is usually only financially responsible up to a deductible and coinsurance.


It is easy to understand why there is confusion. Property Casualty insurance companies are often the same companies that write surety bonds. Both products are regulated by the Department of Insurance and the same licensing is required to sell both.


However, few insurance professionals truly understand surety bonding and vice versa. Surety Bonds are not insurance and should not be treated as such by any party.


How Do You Get a Surety Bond?


It really depends on the type of obligation and the size of the Surety bond. Many bonds can now be issued instantly with a simple personal credit check.


Larger surety bonds and Bond programs require full underwriting. This includes collecting both company and individual financial statements, applications, resumes, job schedules and other underwriting information. Contract Bond underwriters look at Character, Credit, and Capacity. You can read more about that here.


Can I Get a Bond With Bad Credit, Bankruptcy, Judgements or Liens?


Generally surety bonds are obtainable even with bad credit or other credit blemishes. In instances where an individual or company has strong financial resources, and a history of success, it may be very easy to obtain  a Surety bond.


In other situations, it may require the use of a specialty surety bond company or the use of Surety tools such as The SBA Surety Bond Guarantee Program, funds control, and/or collateral.


Generally the most difficult situations involve tax liens. The U.S. Government will take priority over other creditors so tax liens will usually need to be paid or full collateral will likely be required to get a Surety bond.


What Do Surety Bonds Cost?


The cost of a Surety bond depends on a number of factors. The two most important are the type of obligation and the qualifications of the Principal.


A typical range for Surety bonds is 0.5% - 3% of the bond amount. Contract Bonds are typically a one time cost for each project while commercial bonds generally renew each year and the premium is also due each year that the bond is in place.


Do I Have to Sign Personally to Get a Surety Bond?


Generally the answer is yes. Most surety bond companies take into account the owner(s) personal assets when deciding to write a Surety bond. For companies, owners with 15% or more ownership in the company stock will generally be asked to personally indemnify.


There are exceptions. Companies with very strong net worth positions may be able to get surety bonds with only the company's indemnity. However, not every surety bond company will consider this and it is usually limited to companies with over $1 million in analyzed net worth.


Why Does My Spouse Have To Sign?


If an individual is required to personally indemnify the Surety bond company, the spouse will be required to as well. This prevents couples from transferring or sheltering assets. A bond company may be willing to exclude some assets if they are of sentimental value only.


Can Surety Bonds Be Cancelled?


This depends on the type of bond. Most court bonds including probate bonds cannot be cancelled until they are released by the court.


Contract Bonds are also not cancellable They are in place until the underlying obligation has been fulfilled.


Most types of commercial Surety bonds can be cancelled. However there is usually a notice requirement to the Obligee.


Are Surety Bonds Refundable?


Surety bonds that can be cancelled (see above) can usually have the unearned portion of the guarantee refunded. This is not always the case as some obligations are fully earned once the bond is written.


Other surety bonds such as contract bonds cannot be refunded because they are non-cancellable. If a Principal can get the contract bonds returned from the Obligee before the project starts, then they may be refundable.


Do Surety Bonds Require Collateral?


Generally no. A Surety bond is considered unsecured credit because they do not make a UCC filing against the Principal’s assets unless a claim occurs. That said there is an indemnity agreement in place that requires the Principal to make the Surety bond company whole for any loss.


There are instances when Collateral may be required for Surety bonds. These are generally when either the Principal cannot qualify without it, or when the bond is guaranteeing a difficult obligation.


What is a Dividend in Surety?


Dividends are not common in surety. However, some states such as Texas do have dividend plans. In Texas, contractors are eligible for a dividend once their bonded project concludes without any claims. The amount of the dividend varies by bond company.


Are Electronic Surety Bonds Valid?


Electronic Surety Bonds are valid as long as they are issued by a licensed Surety bond company and bond broker. These electronic bonds still need to be sealed with the Surety bond company's seal. They must also include a power of attorney and be signed by an individual listed on the power of attorney.


What is a T-Listing?


T-Listing is an abbreviation for the United States Treasury 570 circular. This is a listing of all the Surety bond companies who are approved by the U.S. Government. A corporate Surety bond company must be on this list for the Government to accept a contract Bond. The listing also provides a value for the largest bond the Government will accept from each company?


What if I Need Surety Bond Larger Than My Bond Company's T-Listing?


Most corporate Surety bond companies have agreements with reinsurance companies or other bond companies for when larger bonds are needed. They simply use the other company's paper to issue the bond.


What a Surety Bond Rating?


Many obligations require that a Surety bond is rated "A-" or better. This is a rating of the bond company's financial strength. This is an indication of the Surety bond company's ability to pay their obligations. A very popular rating service is A.M. Best


The question is often asked, " Do performance bonds require collateral?" The short answer is that performance bonds do not require extra collateral for most contractors. However, a complete breakdown is below.


What are Performance Bonds? 

Performance Bonds are a type of Contract Surety Bond. They are a three party guarantee between a Principal (usually a contractor), an Obligee (the project owner requiring the Bond) and a Surety (bond company guaranteeing the Principal's performance). 


Performance Bonds guarantee a contract. A Principal either completes the bonded obligation for a project owner or the owner can make a claim against the performance Bond. The bond provides assurances that the project will be completed or there will be funds available to finish it.


Performance Bonds are underwritten based on 3Cs. These are Credit, Character, and Capacity. Much of this underwriting is centered around the credit piece. This is a contractor's financial resources.


A Surety bond underwriter provides performance bonds based on a contractor's financial strength. This is usually a multiple of the contractor's analyzed working capital and net worth.


What Collateral Do Performance Bond Companies Take?


In normal circumstances a performance Bond company takes no hard collateral such as a letter of credit or property. However, performance Bond companies do require that the company obtaining the performance Bond and usually the owner(s) of the company sign an indemnity agreement.


If there is a claim on the performance Bond, the Surety bond company will seek to be reimbursed by the company and/or the individual indemnitors.


Indemnity makes performance bonds unique. If there is a loss, a performance Bond company is entitled to the company's receivables and other assets to finish a project or reimburse the Surety bond company.  You can read more about indemnity here.


No UCC Filings on Performance Bonds


Even though a performance Bond company can take over a company's assets in a claim situation, they do take a collateral position and make a filing under the Uniform Commercial Code (UCC) unless there is a claim on the performance Bond or related bond such as a payment bond. Therefore, performance bonds and other contract bonds are considered unsecured credit.


Exceptions to No Collateral on Performance Bonds


There are times when a performance Bond company may require collateral in order to issue a performance Bond. These usually apply in two scenarios.


The Contractor Does Not Qualify Without It


Tough Financials


Many companies and individuals fall on tough times and it hurts them financially. When this happens, a performance Bond company may not be willing to write bonds for the company without additional Surety tools to strengthen the underwriting case. One of these options is to have the company put up collateral. 


The amount of collateral required depends on the bond company and the contractor. There are specialty Surety bond companies that focus on writing contractors in these situations with Surety tools such as collateral.


Large Project


Another scenario when collateral may be required is when a contractor is taking on their largest project. Most Surety bond companies will write performance bonds for contractors that are twice as large as their previously completed project. Other bond companies may go as high as four times. However, collateral may be a way to help the bond company stretch on project size for a contractor. Read more about acceptable types of Surety bond collateral here.


Difficult Obligations


The second scenario when collateral may be required is when the performance Bond is guaranteeing a difficult obligation. This could be a project with forfeiture language, a project with a long term warranty or international Surety bonds. These are certainly not the only examples, but collateral can make a difficult obligation more appealing to a bond company by reducing their exposure to loss.


Alternatives to Performance Bond Collateral


Even when contractors have a difficult job or financial challenges there are potential alternatives to posting collateral.


SBA Surety Bond Guarantee Program


The SBA Surety Bond Guarantee Program can help new contractors and those that have had financial difficulties. If a contractor can qualify, it is usually a better option than posting collateral.


Funds Control


Funds Control in Surety is similar to using escrow. The funds control company handles the contract proceeds on a bonded project. Performance Bond companies will often accept funds control as an alternative to collateral. The benefit to the contractor is that this option does not tie up a contractor's assets and those assets can be used elsewhere.


Additional Indemnitors


Another alternative to collateral is a third party indemnitor. A third party indemnitor is an outside individual and/or company. A third party indemnitor is like a co-signer on a loan. The idea is that they bring additional financial strength to the Bond company to support the Performance Bond. 


Not all Surety bond companies will accept a third party indemnitor. It is also very important for the third party to understand the risk before they agree to indemnify. Bond claims can be very expensive and it is usually a big risk for an outside party to indemnify.


Most performance bonds do not require contractors to put up collateral. Collateral should be viewed as a last resort. At Axcess Surety we exhaust all other options before asking a contractor to post collateral. Contact our bond experts anytime.

Financial Statements are essential for contractors who want to obtain contract surety bonds such as bid bonds, performance bonds, and payment bonds. They are also important for contractors to understand their business and project cash needs. Below are some common types of financial statement accounting methods along with how contract surety bond companies view each. 



Construction Accounting Methods - This green chart shows the 4 types of construction Accounting Methods. The top is a picture of accountants working.



Accounting Methods


Cash Method Of Accounting


The cash method of accounting is the most basic type of accounting. The cash method tracks income when it is received and expenses when they are paid. This method of accounting is very similar to somebody balancing a checkbook. Cash is recorded as it comes in and as it is paid out. It does not account for accounts receivable or accounts payable. Because of its simplicity, many new  and small contractors like to use this method. It can also be tracked very easily without expensive or sophisticated software systems. 


Another advantage of the cash method for contractors is that it can have some tax advantages because it allows the contractor to delay the recognition of some income. The cash method also helps a contractor see how much actual cash it actually has since it should match their bank account. 


Unfortunately for contractors, the Cash Method is the least preferred method for Contract Surety Bond underwriters and most other creditors. It is the least reliable method to represent the contractor's actual financial position in most cases. This is because commercial construction projects typically span multiple periods of time and income and expenses are generated before they are collected. Contractors using the Cash Method of Accounting can expect very little surety bond capacity in most cases. 


Accrual Method Of Accounting


The Accrual Method of Accounting recognizes revenue as they are earned and expenses as they are incurred. With the Accrual Method, it does not matter when the actual cash is received or when the expense was actually paid. 


The Accrual Method uses Accounts Receivable and Accounts Payable on the company's balance sheet to offset the timing. Because income and expenses are tracked as they are earned, the accrual method gives a much more accurate snapshot of the contractor's operations. The Accrual Method can also be easily tracked by most basic accounting software systems. 


A disadvantage of the Accrual Method for contractors is that by itself, it does not give a contractor an accurate position of their actual cash. A company can be very profitable while having no actual cash in their bank to pay their bills. Cash monitoring is vital to all contractors, and running out of cash is one of the biggest reasons for contractor failure and performance bond claims. 


The Accrual Method of Accounting is preferred over the Cash Method by construction bond underwriters and other creditors. It is generally viewed as the minimum standard for a contractor to obtain surety bond credit. However, it has limitations from both a surety and contractor standpoint. In its basic form, the accrual method does not track job performance through a Work-In-Progress Report, including overbillings and underbillings. These are vital for contractors and their bond companies. 


Completed Contract Method


The Completed Contract Method of construction accounting delays the recognition of revenue, expenses and profit until a project is complete.This method may benefit a contractor by delaying taxes to a later period. However, this method would be a detriment to a contractor if taxes are expected to rise in the future.


The Completed Contract method is most appropriate for small projects with short completion times. It could also be appropriate when estimates are hard to establish.


Contractors needing contract surety bonds should not be using the Completed Contract Method. Even if it is beneficial from a standpoint, it does not give the most accurate portrayal of a contractor's current financial picture. Construction contracts regularly span more than one reporting period and contract Bond underwriters and other lenders expect more accurate information.


Percentage Of Completion Method


The Percentage of Completion Method (POC) recognizes income and expenses on a construction project as they occur. The POC method requires that a contractor make reliable estimates of a project's total costs as well as ongoing costs.


Using the POC method, a contractor tracks their open projects through a Work-In-Progress Report. That report shows each project's billings, costs and expected profit or loss as the project progresses. The report also shows a contractor's earned income compared to their billings. Differences are shown as underbillings and overbillings on the company's balance sheet. These are vital for understanding a contractor's true financial position and getting contract surety bonds. 


The percentage of completion method is the most accurate way to account for construction projects. As such, it is also the method preferred by most contract surety bond companies. For contractors wanting the most Surety Bond capacity, it is the only acceptable method for financial reporting. 


Scope of Financial Statements and Contract Bonds




Financial Statements Needed for Contract Bonds - this has five construction signs with different scopes of financial statements and the contract bonds they qualify for. The background is a blue construction site. Orange and black text box.



In addition to the method of accounting, it is important to understand the scope of financial statements and how contract Bond companies view each. 


Internally Prepared Financial Statements


Every contractor needs to be able to generate internal financial statements. Ideally these should be prepared on a monthly basis using the Percentage of Completion Method. These statements should still include a Work-In-Progress report and include under and over billings, along with depreciation. 


Many contractors make the mistake of purchasing a cheap accounting software system for their internal reporting. These systems are insufficient for contractors. Not only can they lead to Contractor losses, they typically make it more difficult and costly for a CPA that does the year end statements. Contractors should invest in a good internal accounting system regardless of whether or not they need contract bonds.


Tax Returns


Almost all companies are required to file Federal income taxes. Some contract Surety bond companies will use these tax returns in lieu of financial statements. There are some drawbacks though. Typically bond companies that accept tax returns require them to be on an accrual basis. This is a problem for many small contractors who have their returns file on a cash basis.


Secondly, these programs are limited in size. Most contract Bond companies can only write bonds up to $1.5 million based solely on tax returns.


Credit Based Contract Bond Programs


The increase in credit based contract Bond programs has significantly changed financial reporting requirements for small contractors. Contractors needing small bonds used to need at least internal financial statements or tax returns. Now they may be better off using a credit based program. Many credit Based programs offer contract bonds up to $1,000,000 or 2,000,000 and the limits on these programs seems to be constantly increasing.


A Compiled Financial Statement (Compilation)


Compiled financial statements are also referred to as "compilations". These statements are prepared by an outside accountant. For a compilation, the accountant does not review or audit the information. A Compilation statement also gives no assurances.


Compilation statements range widely in quality depending on the CPA. These statements can be very good quality and include WIP reports, completed contract reports, ageings and other schedules. They can also be a contractor's internal statements with a CPA letter on top.


The quality of Compilation statements determines the amount of contract Bond capacity a contractor can qualify for. A quality compilation can get bonds upwards of $3 million - $5 million. However, a low quality compilation is often a waste of money and will get a contractor no more bond capacity than an internal statement.


Even a quality Compilation will not be enough for contractors needing regular bonding. They can be a good in between steps as a contractor grows. The risk a contractor faces when getting a Compilation is that their Surety needs grow past the compilation and they may be stuck paying for two statements. 


A Reviewed Financial Statement (Review)


A Review is conducted by a Certified Professional Accountant. During a Review, the CPA uses procedures to investigate a contractor’s financial condition and provide limited assurances to their accuracy and that they are presented according to Generally Accepted Accounting Principles.


A Reviewed Statement should be performed by an experienced construction oriented CPA. A quality Review should include all job schedules, a statement of cash flows, and notes to the financial statement.


A Review only needs to be performed once a year at the contractor's year end. Internal interim statements are sufficient between the Reviews.


For contract bond purposes, a Reviewed statement is sufficient for most contractors. A contractor can expect to receive up to $50 million in surety bond credit with a Reviewed Financial Statement. Of course a contractor still needs to quantify financially.


An Audited Financial Statement (Audit)


An Audited Financial Statement is the best statement a contractor can obtain. During an audit, an auditor analyzes a contractor's financial statements, and internal controls. An auditor attests to the accuracy of the financial statements and gives assurances that they comply with GAAP.


From a contract Bond standpoint, Audits provide the most contractors with the most bond capacity. Audits also provide a great tool for contractors to understand their companies and manage their risk. Even contractors that do not need an Audit from a surety perspective, often get one as a useful tool for their company. Publicly traded companies are required to have Audits.


A Construction Oriented CPA is Vital


Not all CPAs are created equal. Construction accounting is challenging and not many CPAs are good at it. A poor quality statement is often a waste of a contractor’s money. Contract Bond underwriters know what to look for in a quality statement. Poor quality statements hurt a contractor and their bond capacity.


Construction CPAs also understand what contract Bond companies, banks and other lenders are looking for in a financial statement. They can give contractors advice with these stakeholders in mind. Non construction CPAs often try to justify their expense by doing things that may hurt bonding.


Contractors would be wise to select a construction CPA. Friends, relatives or neighbors are usually a poor choice. Good CPAs can be found in construction trade associations and by referral.


Timing of Financial Statements is Important


Contract Bond companies expect the year end financial statement to be completed within 120 days of the contractor's fiscal year end. Anything later could hurt a contractor’s ability to get bonds.


As said above, good construction CPAs understand this. They prioritize getting a contractor's year end statement done. They do not wait for tax filings. This is usually a sign that contractors need to find a new CPA.


Financial Statements are a Valuable Tool


Unfortunately, contractors often view financial statements as a hassle that they have to do for bond companies and lenders. Although they are necessary for those parties, quality financial statements should be viewed as a vital tool for the contractor as well. 


Contractors often go into Bond claim and out of business because they lose track of projects, profits fade or they fail to project cash flow needs. Having reliable internal controls and financial statements helps identify these problems before it's too late.


Consider Outsourcing


Investing and using good accounting software and internal controls can be time consuming and expensive. Contractors should consider Outsourcing this until they grow to a size that they can hire their own full time people and invest in quality systems. Outsourced CFO services are very reasonably priced and can give contractors financial reporting capabilities that they may not be able to afford to do themselves.


Understanding Financial Statements will help a contractor get contract bonds and improve operations. Axcess Surety can make recommendations and referrals based on a contractor's unique needs. Contact us anytime.


surety bonds - What is a Nevada Contractor License Bond - view from the top of a building

What is a Nevada Contractor License Bond?

A Nevada Contractor License Bond is a surety bond required by the State of Nevada to make sure that all contractors who work in the state follow the rules and regulations set forth by the state. Once you are presented with this contract, you must comply with every rule or regulation within 30 days. Failure to do so will result in criminal charges against you, not your company's license (which is why the company needs to file).

The most common contractor license bonds in Nevada cost $15,000. This amount is determined per person, meaning if they have 2 employees it will be $30,000. The price may fluctuate depending on how many future employees they plan to have and for what period of time.

This means that there are companies out there willing to take up the risk in exchange for a fee from you and your company. The fees charged will range from $100-$15,000 depending on many factors including time of year, the overall value of your contract, and if and how much business you've done with that company (if any).

What is a Nevada Document Preparation Service or Legal Document Assistant Bond?

This type of bond is required by the State of Nevada to make sure that everyone who acts as an agent of a document preparer or works at a document preparation service company, follows all state rules and regulations.

The most common Document Preparation Service bonds in Nevada cost $15,000. This amount is determined per person meaning if they have 2 employees it will be $30,000. The price may fluctuate depending on how many future employees they plan to have and for what period of time.

What is a Nevada Insurance Adjuster Bond?

A bond is required by the state of Nevada that states you (or your company) will follow all laws and regulations set forth by the State of Nevada. If you or anyone working for your company violate any regulation, the person who posted this surety bond has to pay up to $15,000 per violation. 

They are also required to post this bond if they want to be an insurance adjuster in the state of Nevada. The most common type of Insurance Adjuster bonds in Nevada cost $15,000. This amount is determined per person meaning if they have 2 employees it will be $30,000. The price may fluctuate depending on how many future employees they plan to have and for what period of time.

The bond is good before the state, meaning any fourth party can use it as a source of payment instead of you. They will contact the surety company who will then check if you have a valid Nevada License and if so, settle with them directly.

This means that there are companies out there willing to take up the risk in exchange for a fee from you and your company. The fees charged will range from $50-$15,000 depending on many factors including time of year, the overall value of your contract, and if and how much business you've done with that company (if any).

What is a Nevada Motor Vehicle Dealer Bond?

A bond is required by the State of Nevada to make sure that all dealerships that sell motor vehicles follow the rules and regulations set forth by the state. This means that there are companies out there willing to take up the risk in exchange for a fee from you and your company. 

The fees charged will range from $50-$15,000 depending on many factors including time of year, the overall value of your contract, and if and how much business you've done with that company (if any).

What is a Durable Medical Equipment Provider or Supplier (DMEPOS) Bond?

Whether you are opening a medical equipment store or looking to open your doors as a supplier, this bond is likely the most common surety bond you will encounter in Nevada. Keep in mind that when applying for this type of surety bond you must have already applied for and received your state license.

The DMEPOS bond protects consumers who purchase medical devices for home use from fraudulent suppliers who carry no insurance or assets. It typically requires a three million dollar minimum aggregate requirement, depending on the size of the population in the area where you do business. This Nevada DMEPOS bond can be passed along to both current and future customers, so it's important to know exactly what goods are being sold under this name.

What is a Nevada Medical Marijuana Dispensary Bond?

If you are looking to do business as a medical marijuana dispensary in Nevada, you will be required to purchase the standard Nevada Surety bond as well as this additional form. In order to qualify for your license, this requirement must be fulfilled. The surety bond protects against trust fund shortages and acts as an indicator of good character since it requires financial accountability from those who run a licensed dispensary facility.

What is a Nevada Notary Bond?

As a notary in Nevada, you are required to take out a surety bond that protects the public from wrongdoing. Since this duty is one of the most important tasks you will ever be given, it's imperative to take things seriously and make sure to carry your bond with you at all times. Notaries must have their bond placed within 90 days of taking office. 

If you fail to complete these steps, or if there is any misconduct connected with your position as a notary, your license could be revoked without warning. Keep in mind that this surety bond can also be used by other jurisdictions where you are acting as an agent for another person or financial institution.

To know more about surety bonds, visit Axcess Surety now!