Whether you’re a new or experienced independent contractor, you need to make sure your firm complies with all applicable construction bonds requirement at all times. Unfortunately, finding information on contractor bonding can be difficult even though the U.S. construction industry has enforced surety bond regulations for decades. As such, this article will explore what independent contractors who work in the Midwest should know about surety bonds.

Surety bond basics

Surety bonds are risk mitigation tools that government agencies use to enforce industry regulations. Each surety bond functions as a line of credit that helps keep contracting firms and individual contractors from participating in unethical business practices.

Surety bonds are not insurance policies and should not be confused as such. Whereas insurance claims are inevitable, surety bond claims are relatively rare because surety providers are so stringent when issuing construction bonds.

Contractors get bonded to guarantee compliance with industry regulations and satisfactory project completion. When a surety provider issues a bond to an independent contractor or construction firm, the bond acts as a legally binding contract that brings together parties.

• The principal is the contractor or contracting firm that purchases the bond as a financial guarantee to fulfill certain obligations.
• The obligee is the the entity that requires the bond, which is the government agency or other project owner.
• The surety is the agency that sells the bond and then acts as an intermediary between the principal and obligee.

If a bonded contractor leaves a project incomplete or does unsatisfactory work, the obligee can make a claim on the bond to gain reparation. If the surety finds the claim to be valid, the bond’s penal sum will be used to compensate the harmed party. Rather than release the bond funds to the principal, sureties typically try to find a new contractor to fix inadequate work or finish incomplete jobs. Although surety providers expect principals to reimburse them after paying claims, they’re ultimately held accountable and thus can incur financial losses when claims are made.

Surety bond regulations

Contractors have to abide by surety bond regulations that the government has set at the federal, state and local levels. For example, the federal Miller Act requires all contractors to post separate payment and performance bonds on any federally funded project that costs $100,000 or more. However, some states in the Midwest enforce their own “Little Miller Acts” that lower the minimum project limit.

Kansas statutes section 60-1111 requires contractors to provide bonds for all public projects that cost $100,000 or more.

Iowa code section 573.2 requires contractors to provide bonds for all public projects that cost $25,000 or more.

Missouri revised statutes section 107.170 requires contractors to provide bonds for all public projects that cost $25,000 or more.

Nebraska revised statutes section 52-118 requires contractors to provide bonds when 1) public projects proposed by the state cost more than $15,000 or 2) when public projects proposed by local authorities cost more than $10,000.

Before beginning work on a new project, contractors should always check with local authorities to determine if any additional bonds are required.

How to get construction bonds in the Midwest

Finding the right Midwest surety provider is easier than ever in today’s market. Most surety providers now offer comprehensive websites that guide independent contractors through the process no matter where they work. Many of these sites offer online applications that contractors can complete in just minutes. Surety specialists then review the application and contact the contractor to discuss the options.

To determine a surety bond premium, the surety provider will conduct a thorough background check of the applicant’s financial credentials. Attributes that could affect the rate include credit scores, bank records and previous project performance. The actual surety bond cost will also vary depending on what the contracted project cost is. Finally, always be sure to find a surety provider that understands your financial situation and bonding needs.