Bid, performance, and payment bonds protect the project owner from contractor default and offer protections to general contractors and subcontractors. The bid bond ensures the general contractor will enter into the contract at the price bid and provide performance and payment bonds if awarded the contract. A payment bond guarantees the general contractor will pay its subcontractors, materials supplies and labor under the terms of the contract. A performance bond ensures the contractor will complete the contract according to its terms and conditions.
Project owners should always check the validity of the bid, performance, and payment bonds presented by the general contractor. General contractors also need to validate surety bonds presented by subcontractors. Subcontractors should ask the general contractor for a copy of its payment bond before starting work and check the bond’s validity.
Avoid fraudulent bonds. It’s easy to make sure the surety company issuing the bond is authorized to do so by the federal government or state insurance department. Keep in mind that fraudulent bonds may have a name similar to a licensed company. Here are four resources to help determine the validity of a surety bond.
State Insurance Departments
Surety companies must be licensed by insurance departments in the states where they do business. The National Association of Insurance Commissioners has a list of state insurance departments, many of which list surety companies licensed to do business on the state website.
U.S. Department of the Treasury Financial Management Service
Treasury’s Financial Management Service administers the surety bond program for the federal government. Federal construction contracts of $150,000 or more must be bonded as specified in the Miller Act. Most state and municipal governments have bonding requirements in their state and local laws, generally known as “Little Miller Acts.” Circular 570: Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies, also known as the “T-List,” is issued every July and lists the names, addresses, phone number, underwriting limits and the states where the approved companies are licensed to do business.
A.M. Best, Dun & Bradstreet, Fitch Ratings, Moody’s, Standard & Poors, and Weiss Ratings are a few of the organizations that rate insurance companies. These are independent opinions of companies’ credit worthiness. There is a fee or subscription required to obtain ratings information. Ratings information will not verify bonding validity, but usually includes company profiles and financial information.
Another good resource is the surety bond producer. The National Association of Surety Bond Producers (NASBP) has a directory of NASBP member producers who can help contractors and subcontractors on obtain surety bonds with reputable companies.