Surety Bonds | Wharton Surety Consultants, LLC

Welcome to Wharton Surety Construction Bond Knowledge Base

Wharton Surety Consultants has been satisfying the bonding requirements of construction contractors for over 20 years. We focus exclusively on bonding and this tight focus enables us to remain informed with regard to the latest trends in our business. We turn this specialized focus and knowledge into an ability to deliver surety bonds and fidelity bonds on your behalf. The information on this page is intended to provide a resource for individuals, corporations and others seeking information regarding the purpose of surety bonds and how to obtain them

Contract Surety Bonds Explained:

A surety bond is a three-party agreement where the surety company assures the obligee (owner) that the principal (contractor) will perform a contract. Construction surety bonds are referred to as “contract surety bonds”.

There are three primary types of contract surety bonds. Bid bonds assure that the contractor will enter the contract at the stated bid price and provide the required performance and payment bonds. Performance bonds protect the owner from financial loss in the event that the contractor fails to perform the contract in accordance with its terms and conditions. Payment bonds assure that the contractor will pay certain workers, subcontractors, and materials suppliers.

The main difference between insurance and bonds is that insurance compensates the insured against unforeseen adverse events. Surety companies have developed underwriting models that are designed to prevent loss and bonds are written with expectation of zero loss. The surety prequalifies the contractor based on financial strength and construction expertise.

The Miller Act passed by Congress in 1935, requires performance and payment bonds on Federal contracts in excess of $100,000 and payment protection for contracts between $30,000 and $100,000. Corporate surety companies issuing these bonds must be listed as a qualified surety on the Treasury List.

Construction is a risky business. Approximately 10% of contractors in business today will fail by this time next year. Surety bonds offer assurance that the contractor is capable of completing the contract on time, within budget, and according to specifications. In order to mitigate this construction risk, surety companies perform extensive pre-qualification or underwriting of construction firms prior to agreeing to provide bonding. When project owners require bonds the likelihood of default is greatly reduced providing the owner with peace of mind. The bond shifts the burden of construction risk from the owner to the surety company.

Surety bond premiums do not vary significantly from one surety to another and can range from 0.5% to 2.5% of the contract amount, depending on the size, type, and duration of the project and the qualifications of the contractor. Performance bonds usually incorporate payment bonds and maintenance bonds.

The surety company’s thorough prequalification of the contractor provides assurance to the lender, architect, and everyone else involved that the contractor is able to translate the project’s plans into a finished project. Surety companies and surety bond producers have been evaluating contractor and subcontractor performance for more than a century. Their expertise, experience, and objectivity in prequalifying contractors is one of a bond’s most valuable attributes. Before issuing a bond, the surety company must be fully satisfied that the contractor has, among other criteria:

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good references and reputation;

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ability to meet current and future obligations;

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experience consistent with the contract requirements;

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equipment to do the work or the ability to obtain it;

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financial strength to support the desired contractual backlog;

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excellent credit history;

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bank relationship and line of credit.

In the event of contractor failure, the owner must formally declare the contractor in default. The surety conducts an impartial investigation prior to settling any claim. This protects the contractor’s legal recourse in the event that the owner improperly declares the contractor in default. If it is determined that there is a legitimate default, the surety’s options often are spelled out in the bond. These options may include the right to re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond. Surety companies have paid more than $10 billion in surety claims due to contractor default in the last 15 years.

When a construction contract specifies that bonding is required, it is the contractor’s responsibility to obtain the support of a surety. The contractor generally includes the bond premium amount in the bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium is adjusted for the change in contract price. Contract bond premiums are based upon the contract price. Contract surety bonds are a wise investment – providing qualified contractors and protecting public owners, private owners, and prime contractors from the potentially devastating expense of contractor and subcontractor default.

This is how owners, lenders, taxpayers, contractors, and subcontractors are protected:

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The contractor has been pre-qualified and is judged capable of fulfilling the obligations of the contract;

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Contractors are more likely to complete bonded projects than non-bonded projects;

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Subcontractors have no need to file mechanics’ liens on private projects when a payment bond is in place;

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Bonding capacity can help a contractor grow by increasing project opportunities;

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Surety companies may prevent default by offering technical, financial, or management assistance to a contractor; and

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The surety company fulfills the contract in the event of contractor default.

To apply for a bond, click here: Bond Application