Seeking Government Construction Contracts: Surety Bonds

Federal contracts can be a steady and reliable source of business in the construction industry. However, working with the government requires paperwork and preparation. Many federal contracts require that construction companies possess surety bonds. At first glance, it may feel off-putting part, but is it really? Let’s take a look.

Not Insurance; Surety Bonds are an Investment

In 1935, as the US struggled with the Great Depression, Congress passed the Miller Act to ensure that suppliers and subcontractors on federal construction projects would be paid despite the difficult economic climate. To accomplish this, the government requires construction companies to supply payment bonds, or surety bonds, for all projects exceeding $100,000. In addition, many states have adapted the Miller Act at the state level, known as “Little Miller Acts.”

Surety bonds more closely resemble an investment vehicle than insurance, even though they are typically obtained through insurance companies. The difference is that surety bonds still require financial payment from the contractor should the project go awry. Insurance premiums preclude this requirement and protect the insuree. Insurance companies view these bonds as becoming a financial partner with the contractor.

Types of Surety Bonds

When it comes to construction matters, the most common surety bonds generally fall into two categories: payment bonds and performance bonds.

Payment bonds guarantee the owner that the contractor will pay all subcontracted fees and suppliers for the project.
Performance bonds state that the contractor will complete the job well and in a timely manner.

Before awarding the bond, the insurance company will do a thorough review of your company’s financial health and credit-worthiness. Companies look to the “three Cs” according to SBA.gov:

Capital: insurance bonding companies want to make sure your liquidity and cash flow are sufficient to complete construction projects and that you carry a manageable amount of debt.
Capacity: Do you have sufficient team members and resources to draw upon? The underwriter will look at skills and experience of the company.
Character: How have you managed construction projects in the past? Have they been on time? Have there been any major disturbances to projects that could produce a red flag to those hiring construction contractors?

The evaluation process will take the most amount of time. It does require organization and well-kept financial and project records. CRG has extensive experience in the federal contracting world and have been part of the process as clients have sought bonding. We’ll continue to examine the federal contracting process in future posts and we would like to hear from you with your experiences and questions.