Performance and Payment Bonds – Know the Rules

Some contractors don’t understand bonding, or see the importance.  In fact, I have contractors tell me that they think the whole bond industry is pointless and a joke.  An experienced public works contractor has extensive knowledge of contracts, bonding, banking, financial analysis, change order processing, and California law, in addition to its knowledge of construction. But it’s often those contractors that are either new to public works, or just haven’t accepted its rules, that have a difficult time with bonding. If you are reading this and you are one of those contractors, we have a message for you – play by the rules or find a new playground

The Miller Act of 1935 made it a federal law that performance and payment bonds are required for projects of a certain size.  And nearly every state has adopted Little Miller Acts that lower those limits. The point being, the bonding industry is not going away any time soon so if a contractor wishes to do business in the public works arena, they need to accept the fact that there are certain ‘rules’ that need to be followed. From understanding prevailing wage laws to bonding requirements, a contractor may not like these rules, but they need to adhere to them.

Some of these ‘rules’ in bonding include investing in a CPA reviewed financial statement, understanding percentage of completion accounting methods and why it’s important, reinvesting money in the company, what helps and hurts bonding capacity, communicated with their agent, securing a business line of credit, just to name a few.

Those contractors that truly want to grow their business understand that these ‘rules’ are really just good business principles, regardless of public work or private work.  By learning and living by the principles required of a contractor’s bond company, it will lead to greater margins, a healthier business, and ultimately more money.