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Construction Bonding Q&A – Everything You Need to Know

Jun 7, 2024 | Blog

When embarking on a career as a General Contractor (GC), understanding the intricacies of construction bonding is crucial. Bonding can significantly impact your ability to secure projects and maintain a solid reputation in the industry. Here, we’ll break down a conversation between seasoned professionals about the importance of bonding, the potential pitfalls, and practical advice for new GCs.

The Importance of Bonding Capacity

Q: What is bonding capacity and why is it important in construction?

A: Bonding capacity refers to the maximum amount of bonded work a contractor can undertake at one time. This is crucial because it directly affects your ability to secure projects. If a job requires a bond that exceeds your capacity, you’re essentially out of the running for that project.

It’s essential to understand your bonding limit and ensure it aligns with the projects you’re bidding on. Before you put numbers to paper, run through the potential costs and ensure they fall within your bonding capacity. Otherwise, you might be wasting your time and resources.

Working with Your Insurance Company

Q: How does your relationship with your insurance company affect your bonding?

A: Your insurance company plays a pivotal role in determining your bonding capacity. If you’re required to show proof that your insurance will cover the job’s amount, any failure to meet this requirement can disqualify you from the project.

Having a strong relationship with your insurance provider can provide flexibility. They might cover you for additional costs if you have a good track record. However, newer contractors or those with limited history may face stricter limitations.

The Role of Subs and Umbrella Coverage

Q: Can subcontractors help with bonding requirements?

A: Yes, subcontractors can cover their portion of the bonding, provided the GC or the project owner agrees to this arrangement. This approach can ease the bonding burden on the main contractor.

Some project owners might require umbrella coverage, which means the GC’s bond covers all subcontractors’ work. This offers the project owner more security but also requires the GC to have higher bonding capacity.

Legal and Financial Ramifications

Q: What happens if you default on a bonded project?

A: If a contractor defaults, the insurance company must cover the costs to hire another contractor to complete the work. This process can be lengthy and complicated, involving potential litigation and further delays.

Defaulting on a bond not only impacts your current project but can also damage your reputation, making it difficult to secure future insurance and bonding. In severe cases, it could lead to business closure.

Navigating Change Orders

Q: How do change orders affect bonding?

A: Change orders, which are common in construction projects, increase the project’s total cost. Your bonding company will require additional fees to cover these increased costs.

For example, if a project starts at $10 million and change orders add another $1.5 million, you must pay extra to bond this additional amount. If your bonding capacity is already stretched, these extra costs can be problematic.

Practical Tips for Managing Bonding Capacity

Q: How can contractors manage their bonding capacity effectively?

A: Aim to keep your project bids within 20% of your maximum bonding capacity. If a project and its potential change orders push you beyond this limit, it may be wise to reconsider your bid.

For experienced contractors with established relationships with their insurance providers, there might be some leeway. However, newer contractors should be cautious and stay well within their limits to avoid potential bonding issues.

Understanding and managing your bonding capacity is crucial for any contractor. It requires careful planning, strong relationships with insurance providers, and a strategic approach to bidding. By keeping these factors in mind, new GCs can avoid common pitfalls and set themselves up for success in the construction industry.

For those just starting, remember to always:

  1. Know your bonding limit.
  2. Maintain a good relationship with your insurance company.
  3. Consider the implications of change orders.
  4. Stay within a safe margin of your bonding capacity when bidding.

By following these guidelines, you’ll be better equipped to navigate the complexities of construction bonding and build a reputable contracting business.