Contract Bonds

A contract bond is a type of surety bond used by construction contractors to guarantee that a project will be completed according to contract terms. If a contractor defaults or fails to meet obligations, the project owner is financially protected.

Contract bonds are required for federal projects over $100,000, as mandated by the Miller Act, for many state and municipal projects under similar “Little Miller Acts” and are often required by private owners for large or high-risk projects.

They involve three parties:

• Principal – the contractor who purchases the bond and is responsible for fulfilling the contract.
   
• Obligee – the project owner or entity requiring the bond, protected if the contractor fails to meet obligations.
   
• Surety – the bonding company that guarantees the contractor’s performance and may step in to cover losses if the contractor defaults.
   

If contract terms are violated, the surety may compensate the obligee and seek reimbursement from the contractor. Violations can result in financial liability, legal action, project delays, and reduced bonding capacity, so understanding responsibilities is essential.

The cost of a contract bond is called the premium. The premium is a percentage of the total bond amount, not the full bond value.

Most contractors pay a premium ranging from 1% to 3% of the bond amount, though rates can be higher for applicants with lower credit or limited experience.

Several factors determine the percentage you’ll pay:

• Credit score – Strong credit typically qualifies for lower premiums
• Experience – Contractors with proven project history are viewed as lower risk
• Financials – Cash flow, net worth, and financial statements matter
• Job size – Larger or more complex projects may carry higher risk
   

Contract bond cost example

If a project requires a $100,000 contract bond:

• At a 1% premium, the cost would be $1,000
• At a 3% premium, the cost would be $3,000

1. Identify the Required Bond Type and Amount

The obligee or licensing authority will specify:

• The bond type (bid, performance, payment, or license bond)
• The required bond amount
• Submission deadlines

The bond size and terms may also depend on your financial strength, credit history, work experience, and current workload. Reviewing project documents carefully ensures compliance with both the obligee’s requirements and the surety’s conditions.

2. Contact a Reputable Surety Bond Company

Contract bonds must be obtained directly through a reputable surety company. At Lance Surety Bonds, we work with contractors to guide them through the bonding process and ensure the right bond is issued for each project. We can help you:

• Identify and secure the appropriate bond through our surety network
• Explain requirements, documentation, and timelines
• Improve your chances of approval by preparing a strong submission
   

Working with us provides clarity and support throughout the process, helping you meet both project and licensing requirements.

3. Complete the Bond Application

You’ll submit an online application, providing details about:

• Your business, including relevant financials and key personnel
• The specific contract or project
• The type and amount of bond required
   

Accuracy and completeness are critical. Submitting thorough and correct information helps streamline the underwriting process and reduces the chance of delays.

4. Undergo the Underwriting Review

The surety reviews your application to assess risk and determine your ability to fulfill the contract. Underwriting typically evaluates:

• Financial strength and stability
• Credit history
• Work experience and past project performance
• Current workload
   

This review determines bond approval, coverage limits, and premium pricing. Being proactive and organized during this stage can improve your bonding outcome.

5. Receive Your Quote and Pay the Premium

Once your application is approved, the surety will provide a bond quote. The premium is the cost you pay for the bond and is calculated as a percentage of the total bond amount.

Paying the premium promptly ensures your bond is issued without delay, allowing you to meet project deadlines and maintain good standing with the project owner.

6. Sign and File the Bond

After payment, the surety issues the bond certificate. You’ll:

• Sign the bond
• Submit it to the project owner or licensing authority
   

Once accepted, you’re cleared to proceed. All parties must fulfill their obligations under the bond to avoid claims, penalties, or legal disputes. Maintaining transparency and communication throughout the project helps safeguard your bonding capacity for future work.

To secure a contract bond efficiently, you’ll typically need the following documentation:

• Financial Statements – Personal and business statements (up to three years), including balance sheets and income statements, to demonstrate stability and capacity to handle project obligations.
• Credit Check – A personal credit review; higher scores (700+) can help reduce premiums and streamline approval.
• Work Experience – Resumes of key personnel and records of completed projects to show reliability and consistent performance.
• Bank References – Letters confirming account balances, lines of credit, and overall financial health.
• Proof of Insurance – General liability coverage and, if applicable, workers’ compensation.
• Work-in-Progress Schedule – An overview of current projects and completion status, allowing the surety to assess your workload.
• Indemnity Agreement – Personal indemnity signed by the contractor (and sometimes a spouse), committing to reimburse the surety for any claims paid.

Pro Tip: Preparing these documents carefully in advance not only accelerates the bonding process but also helps ensure favorable terms and smoother interactions with the surety.

Securing a contract bond is easier when you follow proven strategies that demonstrate reliability and reduce perceived risk. Consider these best practices:

• Maintain Strong Financials: Keep accurate, up-to-date financial statements, manage cash flow responsibly, and reduce outstanding debt. Strong financials help the surety assess your capacity to complete projects and can lower your premiums.
• Document Work Experience: Maintain detailed records of completed projects, including client references and lessons learned. Demonstrating consistent, successful project performance builds trust with the surety.
• Manage Credit Wisely: Both personal and business credit affect approval and premium rates. Timely payments, low debt, and a strong credit history increase your bonding capacity.
• Plan Ahead and Prepare Documentation: Submit complete, accurate applications with all required documentation (financials, insurance, work-in-progress schedules, indemnity agreements). Early preparation reduces delays and improves approval chances.
• Communicate Clearly and Professionally: Keep the surety informed about changes to your projects, workload, or finances. Transparent communication helps avoid surprises and maintains a strong relationship.
• Leverage Surety Expertise: Work directly with a reputable surety company to receive guidance on bond types, documentation, and underwriting requirements. Expert support ensures your application is thorough and accurate.
• Stay Organized During Projects: Meet deadlines, adhere to contract obligations, and resolve issues proactively. Satisfactory performance reinforces your credibility for future bonding opportunities.

Contract bonds are essential for winning projects, building credibility, and complying with project requirements. Understanding your obligations, the potential consequences of bond violations, and how to work with the right professionals can make the process straightforward and efficient.

Ready to apply? Secure the right bond for your project with our expert guidance and support.