Bonding for public construction: a primer

Public owners require performance and payment bonds on most construction contracts. How bonding works, and how to grow your capacity.

On private jobs, bonds are often optional. On public construction they are usually required, because a public owner cannot place a lien on its own property and needs another way to protect itself and the subcontractors and suppliers on the job.

The two bonds that matter most

• A performance bond protects the owner if the contractor fails to complete the work.
• A payment bond protects subcontractors and suppliers if the contractor fails to pay them.

On federal construction contracts above a set dollar threshold, the Miller Act requires both. Most states have their own versions, often called Little Miller Acts, that apply to state and local projects.

Bid bonds

Many solicitations also require a bid bond or other bid guarantee, which assures the owner that the low bidder will sign the contract and provide the performance and payment bonds.

What a surety looks at

A bond is a form of credit, and a surety underwrites it like a lender. Expect to provide financial statements, work-in-progress schedules, details of completed projects and information about your key people. Clean, timely financial statements prepared by an accountant who understands construction make a real difference.

Growing your capacity

Bonding capacity grows with your track record and balance sheet. Complete jobs on time, keep your work-in-progress reporting current and build working capital. A broker who specializes in construction surety can help you plan the next step.

Help for smaller firms

The SBA's Surety Bond Guarantee program guarantees bonds for eligible small businesses that might not otherwise qualify, which can help a growing firm take on its first larger public jobs.