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Construction Bonds 101: How Bonds Work & Why They Matter for Getting Paid

Every construction company needs to get bonded, but what do you really need to know to keep your company financially protected?

Join this webinar led by construction bond specialist Matt Bocklage of SuretyBonds.com to hear the key fundamentals and how they relate to payments.

Register for the live session and Q&A to find out:

  • What are construction bonds
  • How to get bonded fast, and next steps
  • Why bond claims happen and how to prepare


Jonny Finity (00:39):

Cool. Well, as people, uh, continue to trickle in, I’ll get us started. Um, my name is Johnny afinity. I’m the content manager at Levelset, a Levelset, um, essentially helps contractors inspires get paid faster. So we have our flagship program is lean rights management. So we help contractors inspires, uh, automate and track their notices on multiple projects, cross country, um, and protect their lien rights, which is a contractor is most powerful tool to get paid faster. Um, but we also have a lot of other things, you know, tools to help contractors assess the risk of their customers before they signed a contract, uh, as well as material financing to get them pay-when-paid terms on materials that we paid for upfront. Um, but one of the things that we talk a lot about, you know, in terms of mechanics, liens is bonds, which are typically, you know, we talk about it from a payment point of view.


Jonny Finity (01:40):

So we talked about the payment bond either on a public project or a private project. Uh, but there are a lot of different types of bonds out there. Um, you know, when we, when a contractor is working on a public project, there’s typically going to be a payment bond. So if you’re not paid rather than filing a mechanics lien, you can file a bond claim with the surety. Um, but that’s just one, one type of bond. There’s lots of different types of bonds. So today, um, Matt Barklage senior account executive was shorted bonds.com is here to, to, to break it down for us. Like, you know, bonds and sureties, uh, are kind of a complicated, uh, nebulous thing that, that, um, a lot of people have questions about. So Matt’s here to answer all your questions today and talk through like some of the different types of bonds and what the process actually looks like to getting bonded. So Matt, take it away. Thank you, Johnny. Hello everyone. And welcome to all about bonds today. We’re going to touch on some bond basics to help give you a better idea of what bonds are and how to secure the correct bond so that you can get paid faster. Uh, my name is Matt [inaudible]. I’m a senior account executive with surety bonds.com. I originally secured my insurance licensing back in 2010,


Matt Bocklage (03:00):

And I’ve been here@suretybonds.com for the last 10 years. Now, in that time I’ve personally issued thousands of construction bonds, NFL, countless contractors, who initially were very confused about what they were needing. Uh, today I’m going to explain what a bond is, how bonds differ from insurance, the best questions to ask. When you’re told you need a bond, how to secure that bond once you know what you’re needing, and then we’ll open up for an audience Q and a at the end. So first off, what is a surety bond? A bond is a financial guarantee or contract between three party. The principal, the surety and the obligate. When a bond is issued, the surety is financially guaranteeing the obligations that the principal will act in accordance with the terms established by the bond. So the principal can be yourself individually or your company. The surety is the insurance company that financially backs and issues, the bond and the obligation is the government entity requiring the bond.


Matt Bocklage (04:08):

Uh, they could be a city like the city of Chicago County, like Los Angeles County or a state like the state of Missouri. So w what does that actually mean? Like for an example, currently in the South, we’re seeing some bad weather with some tornadoes, uh, as a contractor, you might be heading there to help repair some damages. You might find that the city you’re working in will require you to secure a $10,000 license and permit bond to do work in our jurisdiction. You could put up that $10,000 in cash directly with the city, or instead of giving them $10,000, you could contact surety, bonds.com and pay a hundred dollars a year for a bond. That way you have $9,900 available to operate your business. Instead of held up with the government, the surety is guaranteeing the obligation that that money is there so that the principal doesn’t have to put it up yourself.


Matt Bocklage (05:03):

So a bond is a form of a line of credit to protect harm parties in cases of fraud or malpractice on the part of the principal. So how, how does that differ from insurance? I answer a fair number of calls, where the principal asks for a bond to protect their business. Unlike insurance bonds do not protect the principle. The surety bond protects the obligate requiring the bond and the customers of the principal. So for example, with our contractor, the liability insurance will cover any damages done while on the job while the bond is protecting your clients from you taking payment and just disappearing without doing any work in the event of a claim against the bond, the surety will pay out the claim, but then the principal and the owners of that company are personally responsible to reimburse surety on the client. So the bond is not removing the liability from the principal.


Matt Bocklage (06:03):

It is just allowing you to operate without tying up capital. It’s also important to note that surety bonds are not transferable when you purchase a surety bond, it is in place to guarantee that specific bond, we cannot just add a second obligation to your bond. A second bond will need to be purchased. So now that we know a little bit more about what bonds are, we’ll discuss here, when you’ve been told that you need a bond, what to do, you know, chances are you’re in a government office or filling out an application that requires a bond be file that government official or application will probably just say bond. So most people I speak with will call in and say, I just need a surety bond. Unfortunately, you can’t just get a bond the easiest way I can think to explain this, as you would never go to a car dealer and just ask for a car, there’s a very specific vehicle you’re looking for, whether that’s like a 20, 20 Ford F-150 or a 1970 Volkswagen beetle, both our vehicles, but both serve different purposes.


Matt Bocklage (07:05):

So when you need a bond, there’s a very specific form amounts and way the bond needs to be issued. Having that information upfront by asking a few additional questions can help save you a lot of time. The first question you’re going to want to ask when you find yourself needing a bond is you’re going to want to determine what type of bond is needed. So you’re going to want to ask, is, is this for a license requirement, or is this for a government contract, the most common requirement you’re going to come across as for a licensing or permanent occupation. These are bonds needed to work in a certain area, typically at like the city County or state government level. Uh, it’s important to note that no two requirements are the same meaning city a might want a $5,000 bond listing you specifically as a roofing contractor.


Matt Bocklage (07:56):

While 10 minutes down the road, city B might want a $10,000 bond listing you as a general contractor. And you could be doing the same work in both of those cities. The second type of bond you might find yourself needing is a performance and payment bonds. These bonds guarantee a contract you have with the government, that contract could be anything from constructing a road for a city or the wiring and a school for a County for these bonds. It’s important to note that there are no blanket coverages for them, meaning they are issued on a contract by contract basis and guarantee the completion of that specific contract. Uh, so the first type of bond we’re going to take a look at here is for license and permit requirements. Unfortunately, in my experience, Arby’s often will not give you all the information you need upfront to make sure that the correct bond is issued.


Matt Bocklage (08:50):

When you call a surety bonds.com or visit our website. The last thing we want to do is send you back to the obligate hour. Sometimes it’s necessary because you were not given enough information to make sure the crack bond is issued. Uh, the only thing worse than having to contact the obligate again upfront is delaying your project because the obligate rejected the bond for being incorrect. Uh, feel free to give me a call when you’re ever in an obligate office, uh, here@suretybonds.com. We have a extensive library of bond requirements. It can always figure it out, but having you close to the obligation in the event of an additional question, uh, is never a bad thing. So when you first hear, see that a bond is needed, asked obligate, if there’s a specific bond form, it must be issued on the policy has to be on that form, or they will not accept it, uh, who is requiring the bond, meaning how exactly will the city or county’s name also, how will your company or your personal name need to be on the bond? Uh, what bond amount do I need? You know, depending on the obligation, this could be a $5,000 bond or a hundred thousand dollars and even higher. And then lastly, what trade or licensing should I apply for? Uh, do they want you listed as a general contractor or do they want something more specific, like roofing, electrical, or plumbing contractor on there? If we have answers to all those questions, we can make sure the bond is issued correctly so that you can get to work faster.


Matt Bocklage (10:21):

All right. So next, we’re going to take a look at, uh, questions to ask. When you need a bond to complete a contract for a government entity, when you are bidding a contract with the government, they will often require a bond to guarantee the contract. These bonds are referred to as performance and payment bonds. When speaking with the obligate, you will want to make sure you secure the RFP, which stands for request for proposal. This is usually issued when they are seeking beds. Also a copy of the contract would be great if it’s available. Oftentimes it’s not yet, but if you can, that’d be great. Uh, without at least the RFP, we don’t know what we’re guaranteeing. So we have to have that to continue with underwriting. The underwriters will also want to see financials for these bonds. So you’ll want to make sure that your profit and loss statements and corresponding balance sheets are all up to date.


Matt Bocklage (11:14):

Uh, for these bonds, it’s best to contact me directly so that we can discuss the contract requirement and see what additional information we will need to submit to underwriting for approval. All right. So now that we know what bond we’re needing, uh, we want to know the price, the most common type of underwriting for licensed bonds or what we’ve referred to as freely written or instant issue. Uh, most of your city bond requirements will fall in this category. They do not require underwriting. And therefore, when you work with shorty bonds.com, they can be purchased online or over the phone. And typically emailed to you within minutes. Uh, rates are usually going to be a hundred to $250 a year. And depending on the recall, or I’m sorry, a year, depending on the requirement. And if you ask all the licensing bond questions upfront, then you know, it’s going to be issued correctly and you can get to work faster with that policy, uh, pricing for bonds that are required for state licensing or with amounts greater than 25,000 are usually credit-based meaning the price that you pay is based on an assessment of the owner’s credit history.


Matt Bocklage (12:21):

A common question I get is, uh, will this hurt my credit with us? It’s a soft credit review, so it will not impact your credit while the pricing isn’t instantaneous. I can usually have the quote to you that same day and often have the bond issued the same day as well. Lastly, uh, personal and business financials are needed for performance and payment bonds and very large bond, uh, licensing bonds about a hundred thousand dollars and higher. So now that we have our bond and we have our price, how do I secure the bond so I can file it and get to work the obligation requiring the bond, determines how they will accept the bond, a growing number of obligations. We’ll accept versions that we can email you to print sign, and then file. However, others still require a document with a Ray seal to verify its authenticity so that we’ll actually have to mail to you to meet the requirement.


Matt Bocklage (13:18):

Uh, we’ve got an overnight two-day or three-day option for you on that. So you can still get it right away, and I’ll be able to explain exactly how that bond needs to be sent to you upfront. So there’s no surprises for you. Uh, bonds can seem a bit confusing at first. However, once you get one or two of them under your belt, you’ll have no problems navigating the requirements. Uh, plus you’ll always have myself or surety bonds.com available for any questions you might have. Uh, there’s no one in the surety market quicker than us here@suretybonds.com. So we can make sure you get paid faster. Uh, that kind of concludes my quick presentation here about bonds and the pricing and how to secure them. I think we’re going to open up here for some questions with Johnny.


Jonny Finity (14:02):

Yeah. If anyone has any questions, feel free to put them in the chat. Um, Matt, I had one question while we’re, while we’re waiting for any, from the audience. Yes, sir. Um, you know, typically, you know, as a contractor grow, they might want to take on more bigger projects. Um, what are some ways that, that a contractor can increase their bond limit? You know, if, if they have a $10,000 bond with you and they need a hundred thousand dollars bond for a bigger project, but they don’t necessarily qualify for that amount, according to the credit check.


Matt Bocklage (14:36):

Absolutely. So it’s tough. It can be tough to get qualified. Uh, the biggest thing I’d say is just having some form of history with the surety, where you do get performance and payment bonds on smaller jobs that require it, and they see you complete those jobs and we can build you up to a higher bond amounts. Um, the second one is a little bit tricky. I definitely don’t want to tell anyone how to fill out their financials, but you can see with contractors that, you know, they fill out their contract or their financials to try to keep the taxes down well, makes a lot of sense. Um, but that can hurt you with the underwriting because it’s not showing everything that it should be, and it might hold you back from getting approved on those larger contracts.


Jonny Finity (15:30):

Cool. We have one question about bid bonds. Um, how, how did bid bonds work?


Matt Bocklage (15:35):

Yeah, so bid bonds really fall under that performance and payment. So basically a bid bond is stating that you’re pre-approved for a performance and payment bond. If you win the contract. So a lot of times you’ll see where the government will require either a five or 10% bid bond filed with your bid. So basically we need to get you pre-approved for the performance and payment bond. And then we can issue that bid bond bonds are typically really cheap, a hundred dollars for the first one you need. Once you get set up in a, a bond line, unless we’ve issued a lot of them and you never want a job, they typically won’t charge that again. And then if you win the job, you know, the performance and payment bond is going to be somewhere between about two and 3%. Um, and then sometimes lower if once we have that history built up


Jonny Finity (16:25):

And that bid bond guarantees that, that you, the contractor will complete the contract for the price that they bid.


Matt Bocklage (16:31):

It guarantees that they are pre-approved for the performance and payment bond. If you’re chosen to, uh, win the contracts basically, or if you’re awarded the contract.


Jonny Finity (16:42):

Gotcha. Um, Brenda asked, they said, they’re on the other side of the equation or the subcontractor for a contractor and the need. They’re not getting paid by the contractor. So how do they go about getting payment on a bond?


Matt Bocklage (16:58):

Yes. So what I would suggest is if there’s a performance bond in place, it should be on file with the obligate, whoever they’re completing the job with contact them, ask for the insurance company that holds the bond, Google that name next to the claims department. It should pull up a way to contact their claims department, uh, get the bond number from the obligate as well, uh, call them, shoot them an email, or get in contact with them, see the sureties claims department. And they should be able to direct you how to go about that.


Jonny Finity (17:31):

Yeah. So one of the things that we commonly hear from some contractors that are in the middle of a payment problem is, you know, how do I even find a good bond information? Um, which isn’t, which is a big problem. And what we always tell people is if you’re a subcontractor working on a job where there are bonds, get that information at the start of the project, like before you ever have a problem, you know, you send a preliminary notice on that job to protect your bond claim rights. In most cases, um, at the same time you sent a notice just request, uh, you know, uh, first page of the contract, which would probably have the bond information in it.


Matt Bocklage (18:06):

Yeah. See, that’s a great tip. Just work it into your vocabulary at the beginning of every conversation to ask for a copy of their bond, that way you have an upfront that’s great tip.


Jonny Finity (18:18):

But in terms of, uh, Brenda, to, to answer that question a little bit further is, you know, anytime that you’re unpaid, where there’s a bond on the project, a payment bond, you know, that that just involves filing a claim with the surety company that provided that bond. Um, and so that’s why it’s so important to have that information before a, a problem ever exists. Because once that, once that dispute is, uh, is underway, it’s much harder to get that information out of the GC or contractor that you’ve worked in for some time. Um, Brenda, let us know if we answered your question or you want any follow up on that. Uh, Amy said as a creditor, should I be concerned when a potential credit applicant has a smaller bond, like a $6,000 bond?


Matt Bocklage (19:08):

Uh, no. Uh, usually the bond amount is not determined by anyone, but, you know, the government entity that wrote the rules or laws that enforce the bond. Uh, so that’s just the amount that they decided has to be in place. Uh, so I wouldn’t be too concerned about that. That was kind of out of the contractor’s hand and they, they can’t really do anything about that.


Jonny Finity (19:33):

So there might be, you know, a giant well-established contractor, but they just have a smaller bond because that’s what was required for that kind of work in that particular location.


Matt Bocklage (19:43):

Exactly. Yeah. That’s what the obligation required for that area. And it has no, you know, it does, it shouldn’t look or reflect poorly on the contractor in any way.


Jonny Finity (19:54):

Gotcha. Um, Lisa says, what if companies do not want to provide the bond information?


Matt Bocklage (20:04):

Uh, I don’t know why you want it. Um, it’s, it’s why you have it so that you can say you’re bonded or to meet that requirement. It’s, uh, as long as you’re operating the business, uh, according, you know, in an ethical and fraudulent freeway, it can’t do any harm to provide that information. So I’m not sure why someone would try to hide that information if there’s a bond in place.


Jonny Finity (20:34):

Yeah. I mean, it goes back to that, you know, requesting, requesting information in the middle of a dispute. Uh, it’s, it’s typically going to be harder to get that information out of, uh, out of the people, especially when it’s, you know, they know you’re requesting that information in order to file a claim. Um, it’s, it’s much easier to get that information upfront just as, uh, as a matter of business, you know, we’re on this project, uh, we always get, get a copy of the bond at the beginning of the project. Um, so it’s, you know, it’s a, it’s a friendly interaction versus an adversarial reactive, uh, experience.


Jonny Finity (21:13):

Um, and so Susan, I had a similar question to, how can you find bond info on the GC or working for if the information wasn’t provided upfront? Um, we have, we have an article, uh, I can share the link, um, with everyone that talks about how to find a copy of the payment bond. Um, sometimes it might be a, uh, on a government project. It might be a, a freedom of information request. Um, there’s a few different ways, you know, the government entity that obligates requiring the bond, um, would have a copy of that bond as well. So if the GC isn’t necessarily forthcoming with that information, there are some other avenues you can, you can go through to get a copy of the bond.


Jonny Finity (21:58):

Linda says, if, if they’re trying to file a claim on a bond and miss the filing timeframe, what options do you have to collect outstanding money? Um, this one, Matt, do you have anything? I don’t have much, I would say, you know, a bond like filing a claim on a bond is very similar to, um, the, the process protecting your right to file a claim on a body is very similar to the process to protect your mechanics, lien rights on a private project. Um, when, uh, when, uh, and there are deadlines associated with that process. So if you miss a deadline, you know, a subcontractor on a government project might be required to send a preliminary notice by a certain time. And if you miss that deadline, you can lose your right to make a claim on the bond. If you aren’t paid. Um, similarly there’s a deadline that you have to meet in order to actually file a claim against the bond.


Jonny Finity (22:55):

And if you miss that deadline, uh, it may be, um, that you lose your rights to actually make a bond claim in that case, you know, losing your lien rights or your bond claim rights, um, can be, uh, can be a challenge. And that, that those are two of the most powerful tools that contractors have to, to conform payment. Um, when there’s a problem, if you lose those rights, you know, it might be taking, uh, to file a claim in civil court, um, you know, over prompt payment or a breach of contract. Um, so there’s, uh, there’s a number of legal avenues that you would have to, uh, collect that outstanding money. It might also be, you know, working with a collection agency to go after, uh, that amount. Um, cause that’s, again, that the terms for that should be outlined in your contract, um, what the payment is is, and when it’s due. Um, I, I’ve got some other resources that we can share in a follow-up email to this, um, to this as well, that will answer some of these questions further. Um, Amy also said, is the bond number and name of the bond insurer completed on a credit application, enough info upfront? Or should we take this a step further and ask for a physical copy? It seems anyone can provide fictitious info on an application.


Matt Bocklage (24:20):

You could always ask for a copy of the bond. Um, they won’t have an original, typically the original was filed with the government office that it was needed for the licensing or to, for the contract. So they wouldn’t probably have multiple originals on hand to send you, um, you could, well, yeah, I mean, what I would suggest is just asking for their broker, you know, get a copy of the bond. Who did they work with? You know, was it surety, bonds.com, give us a call, give us the number. And we can tell you if it’s an effect or not, um, or reach out to the insurance company directly. Uh, but unfortunately they are not going to have multiple originals that they can send you. I think that was if I’m understanding the question, correct?


Jonny Finity (25:10):

Yeah, I think she was saying, you know, someone fills out a credit application and they just write down the, the surety company and the bond number. What you’re saying is she could call you and say, Hey, I’ve got this contractor. Is this bond number valid


Matt Bocklage (25:24):

Right now? We would only have record if we officially issued it. We don’t have like every bond number, but if you search for that insurance company and contacted them or found out, you know, what agency they went through, they’d be able to validate if that bond is legit or not.


Jonny Finity (25:40):

Okay. Um, Chris asked what happens if an obligate makes a claim on my bond that I don’t agree with? Maybe, maybe that’s like a bigger question. It’s like, what happens when a claim is made against the bond? Like, what is your process as the surety?


Matt Bocklage (25:56):

Yeah. So that’s a great question. And there’s no, unfortunately just across the board answer, it depends on the language on that bond. Uh, you know, some bonds are going to be written where, you know, they got the final say, and if they claim against it, they claim against it. There’s not much the surety can do a lot of bonds though. The surety is able to investigate and see if that’s actually a valid claim that’s being made. They would reach out to the principal, get their side of the story, reach out to the obligate. Usually it’s just a misunderstanding and it all gets squared away before any claims are actually made on the bond. Uh, but that’s tough. It’s made out to the obligate and they have the power to really do whatever they seem or whatever they want once they have the policy.


Jonny Finity (27:02):

Oh, you’re immediate on me. Sorry about that. I was just saying Brad, uh, posted in the chat, a link to, to verify, um, a bond that was issued to shore, to bonds.com. So, Oh yeah, there you go. There is a way to go and verify that information. Okay,


Jonny Finity (27:27):

Cool. Well, thank you so much, Matt. Um, and if anyone has any questions, uh, Matt’s email is there on the slide. My email, if you have any questions about payments, you know, we have a lot of resources about making claims against the bond, uh, and how to protect your right to make a claim against the bond on projects. You can send me an email. Um, I’ll put it in the chat. My email is, uh, Johnny dot Finity at Levelset dot com. Uh, feel free to reach out with any questions and thanks again, Matt for sharing. This has been great. I learned a lot. Thank you. Appreciate it. Thanks everybody.