A Contract Bond is a project-specific surety bond that establishes an agreement between three parties: the principal (the contractor), the obligee (typically a city, county, school district, or general contractor), and the surety. This bond ensures that the contractor fulfills the terms of a written contract. If the contractor defaults, the obligee receives financial compensation from the surety. The bond serves as a financial guarantee by the surety company to protect the obligee from losses due to the contractor’s non-performance.
How much does a Washington 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 Washington State?
Contract bonds serve two essential purposes:
- They ensure contractors are prequalified, providing confidence that the contractor who will be doing the work has been thoroughly evaluated and is capable of completing the intended project.
- They offer financial protection to the obligee by guaranteeing the contractor fulfills their contractual obligations, ensures the project's successful completion, and secures payment for laborers and suppliers for their work and materials.
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?
Although a Contract Bond provides the obligee with a financial guarantee from the surety company, it is in everyone's best interest to prevent claims from arising. Common claims on Performance Bonds occur when a contractor causes significant project delays or abandons the work, leading the obligee to terminate the contract. Payment Bond claims typically arise when a contractor fails to pay suppliers on time or neglects to compensate subcontractors for completed work. It’s important to note that under the indemnification agreement, the principal is responsible for reimbursing the surety for any claims paid out on the project.
Who requires Contract Bonds in Washington State?
Work performed for federal, state, and local governments have various requirements for Contract Bonds based on project size and a predetermined bond threshold. In Washington State, Bid, Performance, and Payment Bonds are typically required by:
- Government Agencies:
- State and Local Agencies: These bonds are mandated for public works projects to make sure contractors comply with project terms and protect taxpayer investments.
- Federal Government: Bonds are required under the Miller Act for contracts over $150,000 for federally funded projects
- Private Project Owners:
- Some private developers or businesses may require these bonds as part of their project agreements to ensure financial and performance reliability.
- Contracting Authorities:
- Entities such as school districts, municipalities, counties, and state departments overseeing infrastructure or construction projects often require these bonds.
What information is needed to qualify for a Bid Bond in Washington State?
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 Washington State?
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.