Surety bonds are essential to your company's ongoing ability to bid and be awarded most public and many private jobs. Any hiccups in your surety bonding program could result in your company missing out on work. Here's what we at Winter-Dent want all of our construction clients to know about surety bonds.
A surety bond is a contractual obligation or guarantee made by a surety company that the principal (party performing the work) will meet the performance and financial obligations owed to a third party, the obligee.
Two Basic Categories of Surety Bonds
Commercial Surety Bonds
Commercial surety bonds are a catch-all category that includes motor vehicle dealer bonds, fuel tax bonds, utility bonds, title bonds, and grain warehouse bonds. These bonds are statutory requirements by governmental entities, federal, state and local municipalities.
Contract Surety Bonds
The other major category of surety bonds are contract surety bonds. Contract surety bonds most often guarantee the performance of a contractor (the principal) in a construction contract. This kind of bond ensures that the obligee (the owner of what is being built) won't suffer loss due to failure to complete the project. Contract surety bonds also make sure that subcontractors get paid (more on that in a moment).
4 Types of Contract Surety Bonds
Winter-Dent helps construction companies obtain four different kinds of contract surety bonds:
1. Bid bonds
Bid bonds protect the owner if a bidder is awarded a contract but fails to sign the contract or can't obtain the needed performance and payment bonds.
2. Performance bonds
Performance bonds provide the owner a guarantee that the project will be completed in accordance with the terms and conditions of the contract.
3. Payment bonds
Payment bonds ensure that named subcontractors and suppliers will be paid as promised in the construction contract. A payment bond is usually issued simultaneously with the performance bond.
4. Warranty bonds
Warranty bonds ensure that any defects in construction will be remedied in the period covered by the bond.
Every federal contract for over $150,000 requires a surety bond. Many state, county, city, and township construction contracts must be bonded. It's not unusual for private projects to require construction surety bonds as well.
Stay Out of Trouble by Staying on Top of Your Surety Program
Where you can get into trouble is not having your surety program set up before you need a bond. Let Winter-Dent help you be proactive! Every year your surety company will need to see:
Your company's financial statements.
The personal financial statements of each owner.
A reference letter from your bank, with a statement regarding your line of credit usage.
A work in progress schedule.
After reviewing your annual program updates, the surety company will also need to be informed of any major capital expenditures in the last year, any new products or changes in your business, problematic jobs, or major increases in debt. They will also want to be informed if any partner or shareholder in the company has retired, been bought out, or if any large distributions of cash have been made.
A Common Problem to Consider
Your accountant gets an extension for filing taxes. That's fine...and actually quite common. However, that DOESN'T mean that you have an extension for updating your surety bond program. Your surety company is going to insist on seeing your financial statements within 90 days of your fiscal year end regardless of what your accountant does with your filing extension.
Many times the accounting world’s strategy to reduce tax liability can be counter-productive to a healthy and growing surety bond program. Communication and planning are absolutely critical to stay ahead of this potential issue.
At Winter-Dent, we know that keeping up with you surety bond program can be complicated. We're here to help. Call us with any questions you have about surety bonds. Our surety division is here to help!