What Is a Continuous Contractor Surety Bond?
A Washington continuous contractor surety bond is an agreement between the contractor and a surety company, to comply with applicable state regulations as the contractor completes his projects. It is supplied at the contractor’s expense and the surety company guarantees the contractor will abide by the terms of the bond. If the contractor violates the bond, then the surety company may be required to fork over a sum of money to cover the violation.
Surety bonds also differ from insurance in that although they protect third-parties like subcontractors and suppliers, they do not take care of partial, or complete, business failure claims. The legal obligation is on the contractor, not a third party. Most contractors still have to hold their own general liability insurance policies, but surety bonds give them another benefit, which fosters relationships with subcontractors , suppliers and others.
Washington continues contractor surety bonds are based on credit, and remain in effect until canceled. Surety companies perform credit checks on continuous contractor surety bonds, requiring higher credit scores and more information than for a custom bond. Please keep in mind that a continuous contractor surety bond cancels previous bonds you may have in place, although customs bonds do remain in place, such as public works bonds. The individualized nature of surety bonds mean you and the bond are taken on a "one-on-one basis" and every contractor bond is different.
When it comes to the continuous contractor surety bonds, the principal must comply with RCW 18.27.040. The continuous contractor surety bond amount is a minimum of $6,000, but it may go up to a maximum of $12,000 per contractor. You need to speak with your local jurisdiction to determine the amount for your city.
The Role of Surety Bonds in the State of Washington
The importance of surety bonds within Washington is not a complicated thing. It is something that is represented in the law of the state that mandates that there be a total bonding amount for the protection of the project owner. Essentially, it is a way to protect yourself as an owner if the contractor fails to fulfill his or her duties.
The requirement for these Washington Continuous Contractor Surety Bonds is found in RCW 18.27.040, which provides: "(1) Any person, firm, partnership, corporation, or association making an application for a registration certificate under this chapter shall file with the director a bond. A payment bond and an additional bond may be required by the director under RCW 18.27.020(4). However, a bond may not be required from ((a)):
(a) Limited liability companies organized pursuant to chapter 23B.03 RCW; or
(b) Public agencies performing work as general contractors. (2) The bond required by this section, and the bond required by the director under RCW 18.27.020(4), shall: (a) Be in an amount determined by the director, but not less than six thousand to ten thousand dollars for each project, or five thousand dollars for each project when the contractor is a limited liability company organized pursuant to chapter 23B.03 RCW; (b) Be issued by a surety or sureties authorized to issue such bonds in this state; (c) Be on a form prescribed or approved by the director; (d) Be payable to the state of Washington as trustee for the beneficiaries of the bond as their interests may appear, including but not limited to, any present, past, or potential owners, laborers, material suppliers, subcontractors, and any other persons or firms who perform work or supply materials or equipment or services of any type in connection with a contract performed through the bond principal on the job site described in the bond; and (e) Provide that, upon the direct beneficiaries complying with the conditions and requirements prescribed in this chapter, the beneficiary or beneficiaries may file suit directly on the bond, and the bond shall be construed as a bond executed to the beneficiary or beneficiaries."
Qualifications and Requirements for Contractors
Washington requires some contractors to obtain a continuous contractor surety bond. These bonds require the principal (the contractor) to enter into an agreement with the surety to be subject to the provisions of the Washington Consumer Loan Act. In doing so, the contractor must agree to conform to all requirements set forth in the Washington Consumer Loan Act for as long as the bond is in force. Required amount of the continuous contractor bond varies based on the type of license held by the contractor and ranges from $1,500 to $5,000.
Washington requires a total of three years of business history in order to be licensed as a contractor. In addition to meeting this business requirement, the applicant must meet educational requirements. The Department will not issue a license until the applicant submits proof of passing the Education Requirement exam, completing of the 8-Hour Pre-Examination Training Course, and registering for the specialty examination with PSI Services LLC (PSI).
How You Can Get a Continuous Contractor Surety Bond
In Washington, a continuous contractor surety bond is a type of contract bond that guarantees the faithful performance of a contract. In lieu of other required contract performance guarantees, the bond serves as an assurance to an owner that the contractor will perform their work in accordance with the contract and pay their subcontractors and suppliers throughout the performance period.
To apply for a continuous contractor surety bond, the contractor must complete an application that asks for information including information about their credit history and financial credentials, the company’s experience and a description of the type of bond they seek. If the bond is of the type that requires underwriting – such as contracts valued at or in excess of $200,000 – the surety company representative completes an analysis to determine whether to approve the bond request and in what amount. Within one or two business days, the surety company provides a written decision to the bonding agent, and if approved, the bond is then issued for the performance of the subject contract.
The typical continuous contractor surety bond is issued for three years at an approximate premium rate of 3%. The bond can be renewed indefinitely, provided the contractor’s financial and credit conditions do not deteriorate and the contractor remains in good standing with their surety.
Costs and Fees: The Financial Side of Surety Bonds
Securing Washington Continuous Contractor Surety Bonds is fraught with costs for all involved. The surety – or bonding company – assesses its client’s credit risk, which corresponds directly to the fee or premium rate charged. The contractor typically pays one percent with a number of bonds spread out through their career. It is important that the contractor compete on the nonbonded portion of the price and not pass through the price of the bond to the owner.
While the Performance Bond is sometimes viewed as a cost of doing business, bonding is provided to protect the owners and the general contractors from default. Bonding rates by licensing level are set by underlying statute, but the level at which a contractor can be bonded goes up as these bonds are paid for by contractors with good credit and careers. Those with issues are left paying higher prices for arguably an inferior product in a marketplace that is unregulated.
Licensing fees in Washington are not deductible expenses by the surety. For each bond written, the contracting division of L&I charges a fee of approximately $25, which is paid to the Washington Department of Revenue. By adding even more costs – and providing no benefit whatsoever to owners and general contractors – the Washington State Insurance Commissioner assumed the right to audit the information they require contractors to submit, including finding third-party companies to comply with the express language of the statutes. Therefore , the bonding costs for general contractors, municipalities and other public entities have increased. How many of these companies even pass an audit is left unanswered while it delays the issuance of the bonds for an inordinate time after the bonds are signed and executed.
In the construction environment, performance of the contract is just as important as the cost to perform. Sureties take one look at financial data and faun over the company with a high debt/equity ratio. In other words, you can’t be having debts that exceed your assets. Dual endorsements or requiring payment and performance bonds for all subs routinely happens on large projects. Most bonding companies have specific language that includes backup sources of revenue to assure the bonding company gets paid. Generally, this means that financing statements and UCCs are filed into the public record-the same way a bank would attach to their customer’s business and assets.
What does this mean to the pre-bid process? It means that the general contractor passes on all the bond costs to the subs in the form of contractual obligations to pay a mistake-prone system. The audited financials aren’t even sent to the sub, mostly because they violate rules of confidentiality. So, when you see a lower bond, that lower price generally makes the provider less competitive. And, if the bids are still high, the owner is left paying a bond premium for services that it will never see.
The Term and Renewal of Surety Bonds
Duration and Renewal of Washington Continuous Contractor Surety Bonds
The Surety agrees to be liable under all contracts that are first entered into during the time period stated in the bond. Continuous Contractor Surety Bonds expire on the renewal date. The renewal is an "anniversary status" which means that regardless of whether the surety receives payment to continue the bond, the bond continues for an additional year. The Contractor must take positive action to avoid lapse of coverage to avoid uninsured work. The Surety is under no obligation to send a notice that the bond is expiring. In the event that a renewal payment is not received before the payment due date and/or a request for continuation of coverage is not sent to or received from the Surety, the Surety shall continue coverage until such renewal payment is received; provided, however, the Surety shall not be liable for any damages the Owner suffers as a result of their lack of coverage. In this event, if the Surety receives the renewal payment or request, and associated paperwork within 120 days of the expiration date of the prior policy, coverage shall be reinstated as of the expiration date for the remainder of the policy retroactive to the expiration date of the prior policy period.
Contractor Consequences and Penalties
Failure to obtain or maintain a Washington continuous contractor surety bond can have serious consequences for contractors. In the event that proof of a contractor’s bonding status is not provided upon request or if the contractor fails to maintain an active bond, they will be subject to legal ramifications.
First, consequences can come by way of monetary penalties. The Director of the Washington Department of Labor & Industries may impose a subsequent fine to those who operate without an active continuous contractor surety bond. These penalties are enforced in an attempt to deter future violations by the contractor in question.
Contractors are also subject to the loss of their license registration. Those who attempt to conduct business in Washington State as a contractor without an active continuous contractor surety bond will have their contractor license suspended or revoked, depending on the number of violations.
Lastly, Washington law allows any person to bring a civil action against the contractor for any damages incurred from construction performed without a continuous contractor surety bond. This means that if a customer has been harmed by roof work carried out without an active continuous contractor surety bond, they may seek redress in Washington courts.
The Advantages of Having a Surety Bond
For contractors, continuous contractor bonds in Washington offer protection at many levels. Perhaps most valuably, they ensure future bonding eligibility. Although not set in stone, most government agencies and larger entities have unwritten guidelines to disqualify contractors who don’t maintain their bonds. This can mean the loss of potential income on future projects.
Continuous contractor bonds in Washington also serve as reassurance that you will have cash resources available in the event of a change order that creates unforeseen costs. For larger contractors, surety bonds can also reduce the amount that needs to be placed in escrow with the Washington State Department of Revenue during the course of their projects.
Clients derive many benefits from continuous contractor bonds as well . Come contract time, you’ll have a plethora of qualified bidders who are bonded and available to work on your project. You won’t face increased costs if a contractor doesn’t have a bond or is forced to eat unforeseen expenses in the event of an error on their part that encourages change orders. Also, bonding can be used as a strong marketing tool when assessing bids and choosing a contractor.
The integrity of the entire field is protected when contractors hold continuous contractor bonds, and that protects the projects they undertake. The state benefits from a level playing field of contractors who have sufficient bonding levels to complete the work they’ve bid on. However, it’s important to keep in mind that suable change orders can result in claims against a bonding without any assurance that the contract will be fulfilled.