| How to Obtain a Bond

There are several options for obtaining a bond depending upon your firm’s specific profile and bond size requirements. Before determining the program that is best for you, carefully review the information provided regarding the following three options. This will help clarify your direction and outline the important next steps to bond approval.

Standard Surety Program

(Bonds in the amount of $500,000 and above)

The Standard Surety Program is a term that is used for a “full submission” in which the company submits a number of financial statements, background information, personal information on all officers, owners, principals and other documents to qualify for a surety bond (either Bid Bond, Payment and Performance Bond, etc.). The Standard Surety Program is for a company that requires a bond that is more than $500,000 OR the company requires many bonds that would exceed $500,000 in total. For a list of documents to be submitted, click Documents Required here.

These documents are then submitted, together with an outline of the company, to the surety company by an agent or broker. The underwriters review all the information and, if qualified, the surety will offer a bond line or program to the company. This is referred to as a Single/Aggregate (or total) bond line or program. Click for a definition of Single/Aggregate.

Once an underwriter has reviewed the information, there are a number of possible outcomes, such as:

  1. The company is declined for a number of reasons, including low credit scores, lack of capital, and/or not enough work history and experience to qualify for the bond that the company requires.
  2. The surety company approves the request for the bond or bond line with no additional terms or conditions, and the company qualifies for a standard surety rate. The surety determines the premium rate for each company.
  3. The surety company approves the bond or bond line request but only on a collateral basis. This would require the company to offer a percentage of the bond in cash, (which is held until completion of the project, plus at least 90 days thereafter, depending upon the project) to offset any risk undertaken by the Surety in exchange for the bond being issued. Click here for a definition of Collateral. Sometimes, the surety will waive collateral if the Small Business Administration (SBA) will offer support on a bond. Visit the Small Business Administration at www.sba.gov for information on SBA-backed bonds.
  4. The surety company approves the bond or bond line request but with the condition of Funds Control, whereby a third party is introduced to offset the risk of non-payment of suppliers, labor, materials, etc. Click for a definition of Funds Control.
  5. The surety company approves the request for the bond only with the condition of collateral and funds control. The Surety is attempting to minimize any risk associated with the bond or bond line.

Small Contractors Program

(Bonds in the amount of $450,000 or less)

Companies that require bonds of less than $450,000 have many options. Many of the surety companies have one to two page applications that require no financial statements or documents, and therefore, require a limited amount of time to complete. If your company needs a Bid Bond or Payment and Performance Bond and the amount requested is less than $450,000, contact us and we will forward the appropriate application to you. In less than 24 hours your surety broker or agent can provide a response, and once you receive approval from the Surety company, your surety agent or broker can have a bond issued to you within 2-3 days. It is that simple!

The Application Process is as follows:

  1. Fill out the application – This will include basic questions on how long your company has been in business, personal information of all owners and spouses, current cash balances for bank accounts, type of projects you have completed and a few other items of information.
  2. Send the application to your agent or broker.
  3. Surety agent/broker submits the application to the Surety/underwriting company.
  4. Await a response – most of the time we receive a reply the same day.
  5. After an approval is received, you sign the General Indemnity Agreement (if necessary).
  6. Any requests for Bid Bonds or Final Bonds are then issued to your company.
Limitations Associated with these Programs:

These types of programs have guidelines as to the types of projects they will accept or “bond”. Most of the guidelines prohibit projects that have a duration of more than 12 months, have any exposure to asbestos or toxic materials, projects that are performed in, on, near or under water, and other such exclusions. In addition, these programs will not accept a company that has a bond still “open” or pending with a different surety company.

Some of these programs will not accept companies where the credit scores of the owners, principals or spouses are below a certain range, if there is a bankruptcy, tax lien or judgment outstanding against any owner or principal, or if the company has been in existence for less than one year.

SBA Bond Guarantee Program

(For companies that do not qualify for bond in a standard surety market)

The SBA (Small Business Administration) has a Surety Bond Guarantee Program that offers assistance to contractors to obtain bonds. The goal of this program is to enable a company to obtain a bond with reasonable terms and conditions, even though the company does not qualify for the bond in a standard surety market. The Surety company and SBA work together to facilitate this process.

Currently, the SBA will guarantee a bond for up to $2 million. These amounts are subject to change at any time.

The Application Process:

  1. Complete the required number of SBA forms (which may vary from company to company). Forms usually required are a completed Contractor’s Questionnaire, Work in Progress Schedule, Personal Financial Statement, Bank Reference Letter, Company Financial Statements, Application, Bond Guarantee Agreement and a General Indemnity Agreement. Additional documents may be requested by the SBA upon receipt of an application.
  2. A copy of any Contract, Award Letter, Bid Specs, etc. Details of the project are required on an SBA form.
  3. Evidence of Discharge of any past bankruptcy.
  4. Copy of payment agreements with the IRS or other government agencies regarding outstanding and unpaid taxes.

These documents are then forwarded to a surety agent and, upon completion, entered into the SBA online system. Once a decision has been reached, this information is forwarded to the Surety Company and the client. If approved, the appropriate bonds are issued.

The fee for the SBA Bond program is required to be paid in advance of a bond being issued (no fee required for Bid Bonds). The SBA fee is $7.29 per $1,000 of contract price (or 0.729%). As an example, if a bond is issued for $500,000, the fee to the SBA is $3,645. There is still an additional fee to the Surety company, which is typically reduced since a fee has been paid to the SBA.

Up to a certain amount (bond size), the SBA does not require CPA Financial Statements. The general rule is as follows:

  • The SBA will accept internally prepared, quality financial statements (as an example, from QuickBooks) for projects that are less than $500,000.
  • For contracts ranging in size from $500,000 to $1million, a CPA statement is required, but does not have to be prepared on an “audit” or “review” basis. A compilation is acceptable.
  • For contracts that are more than $1million, a year-end CPA statement is required to be a review; however, any mid-year or interim statements may be done on a compilation basis.