A Contract Bond is a project-specific surety bond issued between a principal and an obligee. The principal is the contractor, and the obligee is the entity with which the contractor has a written contract and will receive funds in the event of a bond claim, which is typically a city, county, school district, or general contractor. A Contract Bond is a three-party contract under which the surety firm financially guarantees the contractor's performance to the obligee.
How much does an Oregon Contract Bond cost?
The cost of a Contract Bond is between 2.5% and 3% of the contract amount. Rates are based on the financial stability, experience, business reputation as well as bonded project details. For contractors needing larger bonds (above $1,000,000 single aggregate), the rates will be tiered based on the size of the bond.
Bond Estimator
*Prices shown are based on several factors including, but not limited to discount tier structure, project details, financial stability, experience, and proven reputation. Rates do not constitute an offer of coverage and are subject to change at any time.
Why are Contract Bonds required in Oregon?
These types of bonds serve two key functions:
- Prequalify a contractor and provide assurance that the selected contractor has been thoroughly vetted to perform the work they want to undertake.
- Provide financial protection to the obligee in the event that the contractor fails to meet their contractual obligations, as well as ensuring that the contract is effectively fulfilled and that laborers/suppliers are paid for the work and supplies given.
The Contract Bond Process
Contract Bonds have different approval phases depending on what part of the contract stage your business is in.
1.) LETTER OF BONDABILITY: A contractor submitting to be placed on an approved vendor list, typically for state or federal work, must provide a letter of bondability, or a document outlining their current bonding capability. This contract condition may occasionally be written as requiring a contractor's bond rate.
2.) BID BOND: If the contractor is in the process of bidding on the project, they may be required to include a Bid Bond with their submitted bid paperwork. The Bid Bond guarantees that if a bid is accepted, the contractor will enter into a formal contract with the owner and post a Performance and Payment Bond (if applicable).
3.) PERFORMANCE/PAYMENT BOND: After the contract is given to the contractor, the project owner (Obligee) will include criteria for a Performance (contract) and/or Payment Bond. The Performance Bond is a credit line granted by a surety that guarantees that work will be completed according to the terms of the contract. A Payment Bond ensures payment to labor and material providers.
4.) PROJECT COMPLETION: When the project and the required maintenance term are completed, the obligee issues a General Status Inquiry. This completion notice returns the project amount to the contractor's total bonding aggregate available, allowing them to bid and win more bonded contracts.
What happens if there is a claim on the bond?
While the Contract Bond serves as a financial guarantee from the surety company to the obligee, all parties involved must work hard to prevent claims. Typical claims for Performance Bonds include extended delays in completion or abandonment by the contractor to the point where the obligee cancels the project contract. Payment Bond claims are typically filed when a contractor fails to pay a supply vendor on schedule or fails to compensate subcontractors for project work. It should be emphasized that the principal is required to reimburse the surety for any claims made out on the project as a result of the indemnification agreement.
Who requires Contract Bonds in Oregon?
Work performed for federal, state, and local governments have various requirements for Contract Bonds based on project size and a predetermined bond threshold. Under the established 1935 Miller Act any federally awarded project valued at $150,000 and over is required to have a Performance (Contract) and Payment Bond. Many states have adopted their own versions of the Miller Act requirements, known as “Little Miller Acts.”
If you are a contractor bidding on public projects in Oregon, you will nearly always require a Bid Bond. Many private project owners use Bid Bonds for larger or more complex projects to verify that contractors are serious and financially responsible. Bid Bonds are typically required in the following situations:
- Public Construction Projects: Government-funded projects that include the construction of schools, municipal facilities, roadways, and other infrastructure.
- Private Commercial Projects: Building or remodeling office buildings, shopping malls, or industrial complexes.
- Large Residential Developments: Include subdivisions, apartment complexes, and other high-value residential projects.
Performance and Payment Bonds are also required for these types of projects.
What information is needed to qualify for a Bid Bond in Oregon?
A Bid Bond is a type of surety bond required by project owners (obligees) to guarantee that contractors (principals) will honor their bids and enter into a contract if chosen. To issue a Bid Bond, specific information is needed to assess the contractor's credibility and the project's specifics. This includes basic company information (company name, business address, contact info, business type, years in business, contractor's license number); project information (including location, project owner, bid due date); the amount of the Bid Bond (typically a percentage of the bid) and the maximum amount the surety company is obligated to pay if the bond is forfeited; the dollar value of the contractor's bid for the project; bonding history; personal information; and a copy of the bid package or RFP.
What information is needed to qualify for a Performance Bond and Payment Bond in Oregon?
To qualify for a Performance Bond, contractors will be asked to provide information to the surety company to demonstrate their ability to complete the contract as expected. The information requested will vary depending on the type of work to be performed and the size of the contract.
QUALIFYING FOR CONTRACTS UP TO $1,000,000 SINGLE AGGREGATE
Several surety companies offer bonds up to $1,000,000 per bonded project based primarily on a contractor's personal credit. To qualify for these programs, the contractor will have their credit reviewed via a soft credit check. The surety companies are looking for good to excellent credit score, with an absence tax liens, judgments, bankruptcies or past due accounts.
If the credit does reveal these credit negative activities the contractor may still qualify for a surety bond with help from the Small Business Administration (“SBA”), providing collateral, or establishing fund control. CCIS can assist you with obtaining a bond with the SBA.
QUALIFYING FOR SINGLE AGGREGATE CONTRACT BONDS OVER $1,000,000 OR TOTAL AGGREGATE LIMITS OVER $1,000,000
Contractors must demonstrate credibility, capability and capacity to complete the contract. Surety companies will review the business owner's credit along with the following information to determine eligibility for bonds of this caliber:
• Business financial statement
• Personal financial statement for each owner
• Bank references
• Work in progress schedule (“WIP”)
• Accounts receivable aging schedule
Payment Bonds are often required along with Performance Bonds. A Payment Bond guarantees that a contractor will pay all subcontractors, laborers, and material suppliers according to the terms of a contract. Applying for a Payment Bond is similar to applying for a loan. Surety companies must examine whether the contractor has the experience and financial resources to accomplish a job. When analyzing a contractor's experience, surety companies try to answer the following questions:
- Do you have the necessary labor and equipment to finish the bonded project?
- Have you completed any construction jobs similar to this one in scale and scope?
- What is your track record for profitable job completions?
- Do you have internal controls to track and manage work?
What other types of Contract Bonds exist?
There are three other Contract Bonds that contractors need to be aware of, including Maintenance and Supply Bonds.
Maintenance Bond: This bond guarantees that the contractor will fix substandard work at no expense to the owner within a defined time frame. It is not uncommon for the contract to include a maintenance period, usually one year, which is a risk assumed as part of the Performance Bond form. In some cases, the obligee demands a separate bond indicating coverage for maintenance and deficiencies, despite the fact that this is frequently redundant. Obtaining a Maintenance Bond for more than a year might be difficult, and additional underwriting must be considered.
Supply Bond: This bond that guarantees the supply of products such as raw materials, food, clothing, and gasoline, and includes clauses stating the quantity and price of the items requested. A Supply Bond is often requested by materials suppliers rather than contractors.