Drafting the bond requirement into a residential contract

Phil Pavarini is a licensed insurance producer and is compensated when a bond is placed through this site. This page is general information, not legal, tax or fiduciary advice, and it is not a substitute for reading your plan document or contract or for advice from your own counsel. Figures shown are current as of the date on this page.

On a public project the bond requirement comes from statute and nobody drafts it from scratch. On a private residential project it exists only if the owner’s contract creates it. That makes your clause the whole foundation of the bond, and it is the first document the underwriter reads.

This page is a practical checklist from the bond side of the transaction. It is not a form clause and it is not legal advice to your client. It is what the surety needs to see, and the points that most often slow underwriting or leave a gap between the contract and the bond.

Program terms that shape the clause#

• The owner requires, the contractor obtains. The bond is written only on an owner requirement in a signed contract. The contractor applies and is the principal. The owner never applies.
• A real contract. Purchase orders and work orders do not qualify.
• Contract size. Usually $10,000 and up. Each project is individually underwritten.
• The surety supplies its form. The owner’s attorney may review it before the contract is signed.
• Indemnity. The contractor’s business, owners and spouses sign a general indemnity agreement in favor of the surety.

What the clause should state#

1. Bond types. Performance, payment, or both, by name.
2. Penal sums. Usually stated as a percentage of the contract price. Federal work fixes both bonds at 100 percent of the original contract price under FAR 52.228-15, and it is a defensible private default.
3. Obligee. The owner’s exact legal name or names. If title is held in a trust or an entity, say so, and make the obligee match the party that signs the contract.
4. Timing. Delivery of the issued bond as a condition precedent to the deposit or the first payment, not to completion.
5. Surety standard. A surety admitted in the state and listed on the U.S. Treasury’s Circular 570 is a common and objective test.
6. Warranty. The warranty period and scope, in the contract, so that warranty obligations sit inside what the performance bond guarantees.
7. Liquidated damages. A stated amount, if your client wants delay damages to be recoverable on a predictable basis.
8. Payment terms. Deposit, draw schedule, retainage if any, and conditions for each payment.
9. Cost allocation. That the contractor procures and pays for the bond, and whether the premium is included in the contract price.

Is the bond requirement already in your signed contract? Apply for this bond, or read the full bond details.

Points that cause trouble later#

Scope. A performance bond guarantees performance of the contract, so a thin contract gives you a thin bond. Plans, specifications and a schedule incorporated by reference are what turn a dispute about quality into a question with an answer.

Change orders. Larger change orders raise the contract price but not automatically the penal sum. Consider requiring the contractor to obtain a rider increasing the bond when cumulative changes exceed a stated threshold.

Owner conduct. The unpaid contract balance funds completion, and an owner who keeps paying a contractor after default, or who is in breach, weakens the claim. Your client should understand that before the first draw, not after the last one.

Default procedure. The surety’s form will contain its own notice and default steps. Read them against your contract’s termination provisions and make sure your client can satisfy both without contradiction.

The form. If your client prefers a particular industry form, such as AIA A312, raise it before the contract is signed. The surety supplies its own form, and whether it will accept a substitute is the surety’s decision.

Payment bonds and lien law#

Mechanic’s lien rights are state law and the interaction with a private payment bond varies widely. In many states the payment bond is simply an additional source of recovery and lien rights survive. A few go further. Florida exempts the owner from most liens on a direct contract when the contractor furnishes a payment bond meeting section 713.23 and a copy is attached to the recorded notice of commencement (sections 713.02(6) and 713.13).

If your jurisdiction lets a recorded payment bond limit or substitute for lien rights, the clause should require whatever filing or recording makes that work, and make the contractor responsible for delivering the bond in time to do it.

Getting it underwritten quickly#

The underwriter is looking for the same things you are: a clear requirement, a stated amount, a defined scope, and terms that do not leave the surety guessing what it is guaranteeing. A contract that states the bond types and amounts, warranty periods, liquidated damages and payment terms in plain words is the fastest route to a quote. Once the contract is signed, the contractor applies with a copy attached.

Common questions