What is a surety bond?
A surety bond is a promise to be liable for the debt, default, or failure of another. A surety bond is a three-party contract by which one party (the surety) guarantees the performance of a second party (the principal) to a third party party (the obligee).
The surety is a company licensed by a state department of insurance to provide surety bonds to third parties to guarantee the performance of a principal.
The principal is the person or entity (in construction, the contractor or subcontractor) on whose behalf the bond is given. It is the principal’s obligation that the surety guarantees.
The obligee is the individual or entity with whom the principal has a contract and to whom the bond is given. In construction, this is the project owner or the prime contractor.
If the owner is the bond obligee, then the prime contractor is the principal. If the prime contractor is the obligee, then the subcontractor is the principal.
Video Tutorial
For additional information, watch What is a surety bond? from the National Association of Surety Bond Producers. This video walks you through the bonding process.
Do I need a surety bond to do business with the State of Colorado?
No, there are many other ways to do business with the state. ACCESSColorado is a great guide and first step toward understanding how to do business with the state.
When do I need a bond to work on a state contract?
State statutes determine the bonding requirements on construction contracts. Read the official regulations in the Procurement Rules and Fiscal Rules.
- Procurement Rules: CRS 24-105-201, Bid Security says for all construction projects estimated to be $50,000 or more, bid security must be at least 5% of the amount of the bid.
- Fiscal Rules: CRS 38-26-106 is very specific for State public works projects $150,000 or more; it shall be a penal sum of not less than one-half of the total amount payable under the terms of the contract. If the contract amount is $500 million or more a letter of credit from a surety is needed. This is for both performance bonds and labor and material bonds.
Why did the State of Colorado create this program?
In 2019, Senate Bill SB19-135 was signed into legislation. The bill legislated a statewide procurement disparity study to track disparities between the availability of historically underutilized businesses and the utilization of such businesses in state procurement.
The 2020 State of Colorado Disparity Study found a pattern of disparities in State contracts for businesses owned by minorities, persons with disabilities, and members of the LGBTQ+ community. State procurement stakeholders released a Final Supplier Diversity Partners of Equitable Business Committee Report with recommendations.
Senate Bill SB22-163, known as the “State Procurement Disparity Remediation Act,'' created the bond assistance program with $2 million in funding to identify gaps, barriers, and improvements to assist small businesses with the bonding process when doing business with the State of Colorado.
What does the program cost?
Guarantees for bond lines will be issued by the State of Colorado with zero fees or cost. However, small businesses will be responsible for the surety companies' typical bond premium charges, and financial management charges.
How does the bonding assistance program work?
The Statewide Bond Assistance Program provides collateral to the surety that could mitigate the surety’s risk and result in the issuance of required bonding capacity.
Does this program write surety bonds?
The program does not write surety bonds and does not participate in the surety company’s underwriting procedure. The Statewide Bond Assistance Program is a source of collateral to mitigate risk to the surety company.
Can I have more than one open contract with a Statewide Bond Assistance Program surety guarantee?
No, each contractor/firm is limited to one open contract with a Statewide Bond Assistance Program surety guarantee. Once the project is successfully completed and the collateral funds on the bond are released, the contractor/firm can reapply to the program.
Can this program help me if I can get limited bonding capacity?
Yes, the bond guarantee could help the surety increase your aggregate bonding capacity.
What type of bonds does the program cover?
The program covers performance bonds (guarantee that a contractor will perform the work as specified by the contract) and payment bonds (guarantee that a contractor will pay for services and materials). The surety company will also provide a bid bond for approved applicants.
What is a performance bond and what does it do?
Performance and payment bonds guarantee that a specific contract is fulfilled according to the plans and specifications and that certain subcontractors and suppliers are paid.
What is a payment bond and what does it do?
A payment bond ensures that certain subcontractors and suppliers will be paid for labor and materials incorporated into the project if the bonded principal fails to pay for labor and materials supplied for the project. A laborer or supplier that has a right to make a claim against a payment bond is referred to as a “claimant.” Who qualifies as a proper claimant under a payment bond is typically restricted or limited by statute, the contract, or the bond. Most payment bonds require a claimant who does not have a contract with the principal to give the principal or surety, or both, written notice of its claim within a specific time after furnishing the labor or materials for which the claim is made. It is critically important to meet these deadlines, in the bond or any statutes governing the bond, or the claimant will lose its rights under the bond.
Can I just a blanket bond to cover all my surety bond needs?
No, because contract bonds—bid, performance, and payment bonds—follow a specific contract/ obligation, and each bond is issued for that particular purpose on a case-by-case basis. A contractor’s bond producer and surety underwriter review the contract documents, especially the scope of work, and make sure that the work under the contract fits within the contractor’s normal abilities and capabilities.
I have my license bond; why do I need performance and payment bonds?
A contractor license bond does not guarantee a specific contract. Contractor license bonds are not the same as performance and payment bonds. They guarantee compliance with a state or local contractor’s license and do not guarantee a specific contract. On the other hand, performance and payment bonds guarantee that a specific contract is fulfilled according to the plans and specifications and that certain subcontractors and suppliers are paid.
What businesses can apply?
Applicants must be a Colorado small business registered with the Colorado Secretary of State (500 or fewer employees). This includes:
- Businesses owned by minorities, women, members of the LGBTQ+ community, veterans, and members of the disability community.
- Businesses two years or older.
- Maximum gross revenue not to exceed $5 million in the most recent fiscal or calendar year.
- Experienced in scope of work as described in state solicitation(s).
- Businesses not currently bonded and may need assistance in understanding and financially meeting bonding requirements.
- Can provide financial statements, a business plan, business profile, business growth plan or a capabilities statement.
What documents will the bond producer need?
Bond producers often have a checklist of information and documentation that you’ll need to bring to a first meeting. The checklist might include the following requested information:
- Past three fiscal year-end financial statements
- Current interim financial statement and aging receivables and payables report
- Copies of any bank loan agreements, including lines of credit and recent line of credit statement
- A current personal financial statement
- A current statement of work in progress
- Resumés of owners/key employees
- Letters of recommendation about the accomplishments of your company
- A statement of qualifications for the company certificate(s) of insurance
- A contractor’s questionnaire, which requests detailed personal and company information, including:
- Business information and details, including articles of incorporation
- Officer information
- Financial and bank information
- Key personnel
- Surety relationship, if any
- Largest completed contracts
- Trade references
- Life insurance information
- Specimen copy of subcontract agreement
Will participating in the Statewide Bond Assistance Program guarantee my firm a contract?
No program offered by the State of Colorado can guarantee a contract. With the exception of certain discretionary procurements, sole-source contracts, emergency purchases, and certain negotiated acquisitions, all contracts awarded by the state are competitively bid.
What are some of the additional eligibility guidelines?
See the Statewide Bond Assistance Program Manual for additional eligibility guidelines.
Return to the construction & bond assistance program page.