Another important step in preparing to bid on City work is bonding, which is required for certain types of City contracts. In this section, we’ll discuss surety bonding, why it is important, and how to obtain it. We’ll also cover certain kinds of surety bonding, like bid and performance bonds.
Surety bonding functions as a sort of insurance policy that helps the City guarantee that your business will complete contract work correctly. The City has an obligation to taxpayers and citizens to make sure City funds are spent responsibly and that infrastructure is properly built. Bonding helps the City see that your business is able to complete quality work in a reliable and timely fashion.
There are four agents involved in a typical bonding agreement:
Your business pays a premium to the Surety Company, which is a small percentage of the bond total. If your business fails to complete work to the City’s standards, the Surety Company will step in to rectify any issues and reimburse the City up to the full amount of the bond.
For example, your business might pay a $100 premium to obtain a $5000 surety bond. The City is then able to recoup up to $5000 in damages from the Surety Company if needed. The Surety Company will then in turn attempt to recoup that amount from your business.
The U.S. Department of Transportation periodically runs a program to help small businesses get bonded called the Bonding Education Program. This program is a good way to increase the bonding capacity of your business.
Additionally, the National Association of Surety Bonding Professionals has an online course for contractors that further explains the bonding process.
A Bonding Agent can help your business to obtain a bond from a Surety Company. The Bonding Agent helps evaluate your business and preapproves your business for an appropriate bond amount. You must work with a licensed Alabama Bonding Agent in order to obtain a bond for your business.
There are various ways to find licensed Bonding Agents. If your business is well-established, you will likely not have any trouble finding an agent willing to work with you. However, if your business is newer, you may need to contact a number of different bonding agents or work with the U.S. Small Business Administration to find an appropriate match.
The National Association of Surety Bonding Professionals maintains a nationwide directory of bonding agents.
The U.S. Small Business Administration also has a directory of bonding agents that are approved to issue bonds backed by the federal government. These bonding agents can be helpful for newer businesses.
Once you have found a Bonding Agent, you’ll work with them to get preapproved for a surety bond for your business. The process is similar to the process you would follow to get a business loan. The Bonding Agent will ask for information about the legal structure of your business, finances, ownership structure and professional references. This information allows both the Bonding Agent and the Surety Company to evaluate the reliability and trustworthiness of your business.
The length of time it takes to obtain a surety bond depends on the specifics of your business and how quickly you can provide the Bonding Agent with the information they need. Occasionally the Agent will discover information about your business that may negatively impact your ability to obtain a bond, however a good Bonding Agent should be able to identify these issues early on. Generally speaking, the process can take anywhere from a few days to a few months.
Getting preapproved for bonding does not typically cost anything. However, once you identify a specific project to bid on, you will need to pay a premium to actually obtain a bond. The bond premium is a percentage of the total bond value. This can range from 1% to 15% depending on various factors, including your business’s financial health and the nature of the project.
A Bid Bond is a kind of surety bond that is submitted along with your bid response. Alabama state law requires that all bid amounts of $10,000 or more be accompanied by a Bid Bond. These bonds are typically 5% of the bid amount, and must be paid at the time you submit your bid in the form of cashier's check, certified check or bank draft made payable to the City of Mobile.
If your bid is unsuccessful, the City will return your check promptly after the bid period has closed.
If your bid is successful, the City will retain your Bid Bond until the completion of the project and subsequent payment.,
The process for obtaining a Bid Bond can be found in the Find a Bonding Agent and Get Your Business Bonded sections.
A Performance Bond is a type of surety bond that helps the City guarantee the quality of your business’s work. The City of Mobile typically requires a Performance Bond for construction contracts. The process for obtaining a Performance Bond can be found in the Find a Bonding Agent and Get Your Business Bonded sections.