This document provides an overview of surety bonds for federal construction projects. It explains that surety bonds are agreements where a surety company guarantees that a contractor will perform a contract and pay subcontractors. There are typically two bonds required - a performance bond to ensure the contractor completes the project, and a payment bond to ensure subcontractors and suppliers are paid. The surety company evaluates the contractor's financial strength, experience, and operations through an underwriting process to determine their ability to take on projects. Bond premiums usually range from 1-3% of the total contract price.

1. Getting Bonded on
Federal Projects
The Basics of Bonding

2. Surety Bonds
 A surety bond is an instrument under which
one party guarantees to another that a third
will perform a contract.
 Surety bonds used in construction are called
contract bonds. Usually this is actually two
bonds – Performance and Payment.

3. What is surety bonding?
Contractor
Owner
Surety Company
3 party agreement
 Owner (Obligee)
 Contractor
 Surety Company

4. What is surety bonding?
- A thorough underwriting process in which
surety companies prequalify contractors.
- Assuring project owners that these
contractors will perform the contract
according to its terms and conditions at the
contracted price and schedule. This is the
Performance Bond.
- Will pay certain laborers, subcontractors,
and suppliers associated with the project.
This is the Payment Bond.

5. The Performance Bond
Protects the obligee from financial
loss should the contractor fail to
perform the contract in accordance
with the terms and conditions of the
contract documents.

6. The Payment Bond
Guarantees that the contractor will
pay certain subcontractors, laborers,
and material suppliers associated with
the project.

7. How does a surety provide the
assurance that a contractor
can perform?

8. PREQUALIFICATION
 An in-depth look at
the contractor’s entire
business operations
 Underwriting is done
to determine
contractor’s ability to
meet current & future
obligations

9. Underwriting
A complete analysis of . . . .
 Capacity to perform
 Financial strength
 Track record & history of company
 Organizational structure & reporting
 Business continuation plans
 Trade references
 Analysis of all projects in progress

10. Surety Company’s Checklist
Before issuing a bond, the surety must be satisfied of
contractor’s
 Good character
 Experience
 Financial strength
 Good credit history –
Company AND Owners
 Established banking
relationship & line of
credit
 Project Management

11. Cost of Surety Bonds
Premium is a fee for the
surety’s underwriting
services.
“In theory, sound
underwriting should result in
no loss to the surety.”

12. What is the cost of guaranteeing
performance & project completion?
1 to 3%
of the total contract price
(or less for large projects)

13. Examples of the Cost of Surety Bonds
Project
Amount
$1 million
Preferred
Bond
Premium
$7,770
Standard
Percent of
Bond
Contract
Premium
Amount
$13,500 .77% to 1.35%
$5 million
$33,200
$47,250
.66% to .95%
$10 million
$56,950
$81,000
.57% to .81%
$20 million
$101,950
$146,000
.51% to .75%
Standard & Preferred Premium are approximate. Premium
listed are from 2 of the nation’s Top 10 sureties. NOTE:
Some surety rates are lower than this example; rates vary
company to company.

14. Bonding for Teaming Agreements
- “Co-Bonding” is used for many teaming
-
-
-
-
agreements
Both parties indemnify each surety through a jobspecific indemnity agreement
Each contractor maintains their existing bonding
relationship
% of co-bonding can differ from the % of teaming
agreement
Does not violate “affiliation” rules

15. Questions???
- For more information you can stop by the
BB&T Insurance booth…
- Or contact me at:
BB&T Insurance Services
Construction Risk Services
Chris Lydick, Surety Specialist
919-281-4522
clydick@bbandt.com