Bonding

There are three basic types of bonds. Bid bonds, Performance Bonds, and Payment Bonds. Bonds can be likened to pre-qualifying for a loan to pay for financial damages caused to the owner, contractor, or subcontractor (you) resulting from working on a project. Although the common idea is that bonds are an insurance policy to protect you on a project, they generally protect the owner or contractor for whom you’re working in case you don’t succeed on the project.

Bid Bonds protect the owner by ensuring the bidder honors the bid submitted, and that the liability for bids that aren’t honored is covered by the surety or the principal contractor. These are insurance policies to protect the general contractor and owner, not you. Bid bonds provide a source of funds to the owner if you don’t fulfill your bid obligation once you’ve been awarded the project. The cost of such bid bonds is routinely listed separately on bid documents and the project owner or public entity can elect to delete a bid bond requirement if they have confidence the bidding subcontractor can back up the bid they submitted.

Performance Bonds are usually required on a project when the contractor or owner is unsure of the subcontractor’s ability to perform the work required by the project. The bond protects them from financial damage on the project and guarantees that if something goes wrong, there’ll be funds available to hire a replacement subcontractor to finish the work. While this is great for the contractor and owner, it places additional risk and liability on you. If the general contractor believes there’s a problem, they may elect to enforce the bond and you will become responsible to repay any money spent by the surety to complete the project or mitigate the claim against the bond. The cost of the bond is normally listed separately on bid documents and is often more than two percent of the project value. The project owner or public entity may elect to delete the bond requirement in favor of a reduction in the project’s cost if they have confidence in the performing contractor.

Payment Bonds are the only ones with some positive value to a sub-contractor. A payment bond is intended to provide a legal instrument to guarantee that a sub-contractor will receive the agreed upon payments for the completion of work. This still isn’t an easy way to collect your money if there’s a problem, and the legal fees associated with enforcing the bond often exceed any expected profits.

Hopefully you’ll never need to obtain and provide a bond; however, if you decide to bid a project that requires one, think twice before submitting your bid. It’s best to only work with contractors and owners with whom you have an established relationship. If they trust you, and know you can complete the work, it’s less likely there’ll be any legal battles where everyone involved loses out. Instead, they’ll be more likely to work through project issues with you, looking at you as a partner rather than a bonded low bid contractor.

If you decide to do a project that requires a bond, the issuing surety will typically require three to four years of financial records reviewed by a Certified Public Accountant. You must show substantial financial assets in excess of your liabilities and meet other minimum requirements such as having successfully completed projects of comparable size and complexity. Remember, this is a big risk so price the project accordingly and be sure you’re on top of all of the contract details and schedules. Many subcontractors, thinking the bond protected them, have been caught unprepared to defend themselves when faced with a bond claim on a project and ended up in financial trouble.

The above content is extracted from Mike Holt's Business Management Skills program.

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Mike Holt is an author, businessman, educator, speaker, publisher and National Electrical Code? expert. He has written hundreds of electrical training books and articles, founded three successful businesses, and has taught thousands of electrical code seminars across the US and internationally. His company, Mike Holt Enterprises, has been serving the electrical industry for over 40 years, creating and publishing books, DVDs, online training and curriculum support for electrical trainers, students, organizations, and electrical professionals. 

Mike has devoted his career to studying and understanding the National Electrical Code and finding the easiest, most direct way to share that knowledge with others. He has taught over 1,000 classes on over 40 different electrical-related subjects to tens of thousands of students. His knowledge of the subject matter, coupled with his dynamic and animated teaching style, has made him sought after from companies like Generac, IAEI, IBEW, ICBO, NECA, and Fortune 500 companies such as IBM, Boeing, Motorola, and AT&T. He is a contributing Editor for Electrical Construction and Maintenance Magazine (EC&M) and formerly Construction Editor to Electrical Design and Installation Magazine (EDI). His articles have been seen in CEE News, Electrical Contractor (EC) International Association of Electrical Inspectors (IAEI News), The Electrical Distributor (TED) and Power Quality Magazine (PQ).