Estimating in Building Construction

Contracts, Bonds, and Insurance 15

required to submit financial reports, experience records, pro-
jects (in progress and completed), as well as other material
that could create a long delay before the bonds are approved.
It is up to the owner to decide whether the surety obtained by
the contractor is acceptable or to specify a company. In the
latter case, the contractor has the option of complying with
the contract documents or not submitting a bid on the pro-
ject. No standard form of surety bond is applicable to every
project. Statutory bonds are bond forms that conform to a
particular governing statute; they vary from one jurisdiction
to another. Nonstatutory bonds are used when a statutory
form is not required. There is no standard form of bond that
is nationally accepted. The customary bond forms used by
the surety companies are generally employed.

Bid Bond

Thebid bondensures that if a contractor is awarded the bid
within the time specified, the contractor will enter into the
contract and provide all other specified bonds. If the con-
tractor fails to do so without justification, the bond will be
forfeited to the owner. The amount forfeited will in no case
exceed the amount of the bond or the difference between the
original bid and the next highest bid that the owner may, in
good faith, accept. The contractor’s surety usually provides
these bonds free or for a small annual service charge of from
$25 to $100. The usual contract requirements for bid bonds
specify that they must be 5 to 10 percent of the bid price, but
higher percentages are sometimes used. Contractors should
inform the surety company once the decision to bid a project
is made, especially if it is a larger amount than they usually
bid or if they already have a great deal of work. Once a surety
writes a bid bond for a contractor, that company is typically
obligated to provide the other bonds required for the pro-
ject. Surety companies therefore may do considerable inves-
tigation of contractors before they will write a bid bond for
them, particularly if it is a contractor with whom they have
not done business before or with whom they have never had
a bid bond.

Performance Bond

Theperformance bondguarantees the owner that the con-
tractor will perform all work in accordance with the contract
documents and that the owner will receive the project built
in substantial agreement with the documents. It protects the
owner against default on the part of the contractor up to the
amount of the bond penalty. The warranty period of one
year is usually covered under the bond also. The contractor
should check the documents to see if this bond is required
and in what amount, and must also make the surety com-
pany aware of all requirements. Most commonly these bonds
must be made out in the amount of 100 percent of the con-
tract price. The rates vary according to the classification of
work being bid. If the work required on the project comes
under more than one classification, whichever premium rate
is the highest is the one used. Almost all general construction
work on buildings rates a “B” classification. The premium

rates are subject to change without notice, and it is possible

to get lower rates from “preferred companies” if the contrac-

tor is acceptable to the company.

Labor and Material Bond

Thelabor and material bond,also referred to as a payment

bond, guarantees the payment of the contractor’s bill for

labor and materials used or supplied on the project. It acts

as protection for the third parties and the owner, who are

exempted from any liabilities in connection with claims

against the project. In public works, the statutes of that

state or entity will determine whether a specific item of

labor or material is covered. Claims must be filed in accor-

dance with the requirements of the bond used. Most often

a limitation is included in the bond stating that the

claimant must give written notice to the general contractor,

owner, or surety within 90 days after the last day the

claimant performed any work on the project or supplied

materials to it.

Subcontractor Bonds. Performance,andlabor and

materials(payment) bonds are those that the subcontractors

must supply to the prime contractor. They protect the prime

contractor against financial loss and litigation due to default

by a subcontractor. Because these bonds vary considerably,

prime contractors may require the use of their own bond

forms or reserve the right of approval of both the surety and

form of the bond. These types of bonds are often used when

the general contractor is required to post a bond for the pro-

ject. This arrangement protects the general contractor,

reduces risk, and allows the general contractor greater bond-

ing capacity.

License or Permit Bond. The license or permit bond is

required of the prime contractor when a state law or munic-

ipal ordinance requires a contractor’s license or permit. The

bond guarantees compliance with statutes and ordinances.

Lien Bond. The lien bond is provided by the prime con-

tractor and indemnifies the owner against any losses result-

ing from liens filed against the property.

2–5 Obtaining Bonds

The surety company will thoroughly check out a contractor

before it furnishes a bid bond. The surety checks such items

as financial stability, integrity, experience, equipment, and

professional ability of the firm. The contractor’s relations

with sources of credit will be reviewed, as will current and

past financial statements. At the end of the surety company’s

investigations, it will establish a maximum bonding capacity

for that particular contractor. The investigation often takes

time to complete, so contractors should apply well in

advance of the time at which they desire bonding; waits of

two months are not uncommon. Each time the contractor

requests a bid bond for a particular job, the application must