Use five construction bonding checks before bid pricing: bond amount, exemption, substitution, eligibility, and selected payment protection.
Key takeaways
- Florida sets the bond amount equal to the contract price, with a specific exception for contracts exceeding $250 million only if the public entity finds that a bond equal to the contract price is not reasonably available, according to The Florida Senate.
- For state work, no payment and performance bond is required when the contract is for $100,000 or less, according to The Florida Senate.
- Minnesota permits a public body to accept an irrevocable bank letter of credit instead of a required performance bond for qualifying public work under $50,000, in the same amount and subject to the same conditions, according to Minnesota Legislature Office of the Revisor of Statutes.
- Michigan limits the cited letter-of-credit alternative to the common-carrier or designated state-subsidized railroad circumstances described in the excerpt, according to Michigan Legislature.
- Federal rules require the contractor to furnish all bonds or alternative payment protection, including any necessary reinsurance agreements, before receiving a notice to proceed with the work or being allowed to start work, according to Federal Acquisition Regulatory Council.
Construction bonding checklist: the checks for an estimate review
Record the applicable bond amount, exemption eligibility, permitted substitute security, and any protection selected by the contracting officer. The contractor shall submit to the Government one of the payment protections selected by the contracting officer, according to Federal Acquisition Regulatory Council.
The review separates Florida bond amounts and exemptions, narrowly scoped state letter-of-credit alternatives, and federal payment-protection arrangements. The five checks are Florida bond amount checks, Florida exemption checks, Minnesota substitution checks, Michigan eligibility checks, and federal protection checks. These checks distinguish documented rules from unsupported premium estimates. Read Construction estimate audit: 5 inputs before a bid, Sealed bid submission checklist: 6 checks to run, and Public bid labor: 6 checks before you lock costs while you price the bid.
Before pricing: identify the Florida amount and exemption
Record the applicable bond amount and exemption eligibility in the bid estimate before finalizing pricing. The bond amount shall equal the contract price, except that for a contract in excess of $250 million, if the state, county, municipality, political subdivision, or other public entity finds that a bond in the amount of the contract price is not reasonably available, the public owner shall set the amount of the bond at the largest amount reasonably available, but not less than $250 million, according to The Florida Senate. This amount is distinct from any premium estimate, which is not established by these provisions.
For state contracts, check the exemption tier. When the work is done for the state and the contract is for $100,000 or less, no payment and performance bond shall be required, according to The Florida Senate. For local entities, the exemption is discretionary rather than automatic. At the discretion of the official or board awarding such contract when such work is done for any county, city, political subdivision, or public authority, a person entering into such a contract that is for $200,000 or less may be exempted from executing the payment and performance bond, according to The Florida Senate.
A third tier applies to state work in the middle range. When such work is done for the state, the Secretary of Management Services may delegate to state agencies the authority to exempt any person entering into such a contract amounting to more than $100,000 but less than $200,000 from executing the payment and performance bond, according to The Florida Senate. Note that this delegated authority applies specifically to state work, not local contracts.
Verify the specific contract value against these three thresholds to determine if a bond is required. If the state contract is greater than $100,000 but less than $200,000, confirm whether the Secretary of Management Services has delegated exemption authority to the specific agency awarding the contract. For local contracts, confirm with the awarding official or board whether they are exercising their discretion to exempt the bond for contracts of $200,000 or less. Do not assume an exemption applies without confirming the specific authority and discretion exercised by the public owner.
During review: test Minnesota and Michigan substitution eligibility
When a public work project for a public body is valued at under $50,000, the public body may permit the contractor to provide an irrevocable bank letter of credit in place of the required performance bond, according to Minnesota Legislature Office of the Revisor of Statutes. The letter of credit must be in the same amount as required for the bond and subject to the same conditions as the bond, according to Minnesota Legislature Office of the Revisor of Statutes. This provision applies whenever Laws 1994, chapter 419, or other law or home rule charter requires a performance bond from a contractor doing a public work project of under $50,000 for a public body, according to Minnesota Legislature Office of the Revisor of Statutes.
In Michigan, the principal contractor may provide an irrevocable letter of credit from a state or national bank or a state or federally chartered savings and loan association instead of the bonds if the principal contractor is a common carrier as defined in section 3 of Act No. 300 of the Public Acts of 1909, as amended, being section 462.3 of the Michigan Compiled Laws, according to Michigan Legislature. The principal contractor may also provide this alternative if it is the designated operator of a state subsidized railroad, according to Michigan Legislature. Do not extend this letter-of-credit alternative to ordinary contractors who do not meet these specific common carrier or railroad operator criteria, according to Michigan Legislature. Verify the contractor’s status against these narrow definitions before accepting a letter of credit in lieu of bonds in Michigan, according to Michigan Legislature.
During review: identify the federal protection selected
For construction contracts greater than $35,000, but not greater than $150,000, the contracting officer shall select two or more of the following payment protections, giving particular consideration to inclusion of an irrevocable letter of credit as one of the selected alternatives, according to Federal Acquisition Regulatory Council. The list of selectable protections includes a deposit of the types of security listed in 28.204-1 and 28.204-2, according to Federal Acquisition Regulatory Council. Another option involves the prime contractor establishing an escrow account in a federally insured financial institution and entering into a tripartite escrow agreement with the financial institution, as escrow agent, and all of the suppliers of labor and material, according to Federal Acquisition Regulatory Council. The escrow agreement shall establish the terms of payment under the contract and of resolution of disputes among the parties, according to Federal Acquisition Regulatory Council. Under this arrangement, the Government makes payments to the contractor’s escrow account, and the escrow agent distributes the payments in accordance with the agreement, or triggers the disputes resolution procedures if required, according to Federal Acquisition Regulatory Council. A final protection type requires the contractor to deposit certificates of deposit from a federally insured financial institution with the contracting officer, in an acceptable form, executable by the contracting officer, according to Federal Acquisition Regulatory Council. Record the specific protection selected by the contracting officer in your estimate notes.
Bond security reference table by publisher
The following table summarizes the security rules for each jurisdiction, using only the cited sources.
After review: notify the bonding company of unsatisfactory progress
Caltrans outlines a process for notifying the contractor’s bonding company of unsatisfactory progress, requiring the district to advise the Division of Construction of the reasons supporting such an action according to Caltrans. If the district believes the lack of progress justifies a meeting, it arranges a conference attended by the contractor’s representatives, the bonding company, and Caltrans according to Caltrans. The Division of Construction may arrange the conference if appropriate, with further details found in Section 3-808, “Contractor’s Control Termination,” of the manual according to Caltrans.
Illustrative example of three round prices
Label three lines on one estimate as illustrative only. Price the lines at 250, 50, and 35. On the line priced at 250, enter a bond amount of 250 so the bond amount equals the contract price. On the line priced at 50, enter the words same amount where a letter of credit would match the bond. On the line priced at 35, enter 2 as a count of selected payment protections. These round prices do not stand in for a statutory threshold, and they are not a premium.
Next step before the estimate is priced
Annotate one current bid estimate with its required security amount, the applicable exemption or substitution provision, and the protection specified by the public owner.
FAQ: construction bonding requirements in your estimate
Does the Florida exemption apply to my state contract or local public contract?
For local public work, the official or board awarding the contract may exempt a person from the bond if the contract is $200,000 or less, according to The Florida Senate. The Secretary of Management Services may delegate authority to state agencies to exempt contracts amounting to more than $100,000 but less than $200,000, according to The Florida Senate.
Can a Minnesota public body accept a letter of credit for work under $50,000?
Yes, the public body may permit the contractor to provide an irrevocable bank letter of credit in place of the performance bond. This applies to public work projects of under $50,000, according to Minnesota Legislature Office of the Revisor of Statutes.
Which Michigan contractors fall within the cited letter-of-credit exception?
The exception applies if the principal contractor is a common carrier as defined in section 3 of Act No. 300 of the Public Acts of 1909, according to Michigan Legislature. It also applies to the designated operator of a state subsidized railroad, according to Michigan Legislature. These contractors may provide an irrevocable letter of credit from a state or national bank or a state or federally chartered savings and loan association instead of the bonds, according to Michigan Legislature.
When must federal bonds or alternative payment protection be furnished?
The contractor shall furnish all bonds or alternative payment protection before receiving a notice to proceed with the work or being allowed to start work, according to Federal Acquisition Regulatory Council.