What is a Surety Performance Bond in Rhode Island?

performance bond - Just how much is a Surety Performance Bond in Rhode Island

The most common type of performance bond used in Rhode Island for construction projects larger than $500 is called a “Contractual Performance Bond” or, more commonly, a “Surety Performance Bond”. You can read about what exactly a surety bond is here. The main idea behind them however is to guarantee payment to subcontractors and suppliers if the prime contractor becomes financially insolvent before all work has been paid for. 

It also provides continued financing while the project is being completed by providing monies needed for workers, materials, and equipment. Without this bond, credit would dry up, creating serious problems for contractors who need expensive materials to continue their work. In many cases, suppliers won’t supply materials to a job site unless they are guaranteed payment by the owner. In other words, without this bond, you may be out of a job literally.

However, there is much more involved in this process than simply signing a piece of paper and going about your normal business. Underwriting is one crucial part that can make or break a surety agency’s decision on giving a company a performance bond. Here are the types of information that our underwriters look for:

  • Financial Stability 
  • Debt to Asset Ratio
  • Company History 
  • Credit References 
  • Debtor/Creditor Ratio 
  • Type of Work/Project Size

Just how much is a Surety Performance Bond in Rhode Island?

You’re about to purchase your first contracting business in Rhode Island. You’ve made the decision that it’s the perfect time for you to finally go into business for yourself and move away from that stifling 9-5 job. 

To start with, you will certainly need a contractor license – however, simply having one doesn’t guarantee success or even getting off the ground on your own. You additionally need some type of guarantee on expected costs as well as labor. One way this can be met is by getting an applicable surety bond. This is called obtaining bonds. 

When you obtain bonds, typically $20,000-$50,000 worth of work may be contracted without any supervision or also bonding by another individual. For those who have a background in construction as well as the know-how to work with your hands, obtaining bonds is fairly easy. In order for you to do this job, nevertheless, it will take time as well as training so that you could obtain the needed skills and also knowledge to do it correctly. 

You’ll be working hard from day one – but if you have specific areas of expertise you’ve discovered on your own over the years, there’s a likelihood you can perform up until a state-licensed level immediately.When being bonding, additionally called being UBC or “underpinning business capabilities” bonded,” it’s vital to understand just what your surety bond can and also cannot do for you. 

The most important objective of the surety bond is to give you the needed guarantees to get started doing work. If you’re bonding, it’s also crucial that you have actually decided just what type of company structure you’ll have.If your objective is being an independent business owner running single or numerous tasks on your own, then maybe this isn’t the ideal course for you. 

But if your desire is to become a contracting organization, operate multiple building projects as well as several fit individuals under one roofing system, after that, bonding may be precisely what you require. You need to understand which company structure will certainly fit your needs prior to making any type of decision about surety bonds – there are certain requirements for each specific kind of company entity.

What’s the process to get a Performance and Payment Bond in Rhode Island?

Rhode Island has recently enacted legislation that requires all contractors seeking payment of $5,000 or more for public works projects to obtain a performance and payment bond. A contractor must also provide notice by certified mail of its intent to seek payment for work under the contract.

All construction contracts in excess of $25,000 must be accompanied by an approved performance and payment bond. This includes owners who are state agencies, municipalities, quasi-municipal corporations, political subdivisions, or municipal authorities. 

The following information is provided in compliance with RIGL 42-35-1 (PDF): 

  • The name of the principal
  • The address of the principal; 
  • A listing of the names and addresses of sureties; 
  • The amount of the bond (not less than 10% of the contract price); and 
  • The signature of a duly authorized representative or legal agent.

The surety company must require that all subcontractors and material suppliers furnishing materials, labor, services, or equipment to any project in excess of $25,000 be bonded and provide a certificate (at no additional cost) indicating the subcontractors and suppliers are covered under their liability. 

A public work contract in excess of $10,000, which is not adjusted annually by wage board recommendations, must include a notice form to the Commissioner at least ten days prior to commencement of work. This notice is to contain: 

1) Name and address of contractor; 

2) Address where plans and specifications may be examined; 

3) Name of owner and address of the property to be improved; 

4) A statement that the prime contractor has performed or is performing public work in excess of $25,000 within the last twelve months for which payment was made without a bond.

How to Get a Performance Bond in Rhode Island?

States like Rhode Island may require performance bonds in some cases because they care about making sure that businesses and individuals fulfilling such contracts can back them up. Like most states, RI has adopted the Uniform Commercial Code (UCC) Act, which is a major part of state-sponsored legislation that helps to ensure companies meet their financial responsibilities.

The UCC Act is made up of three articles; Article 1 deals with general agreements related to “commercial paper” or business transactions between merchants, Article 3 covers letters of credit and other credit services like performance bonds, and Article 4 looks at warehouse receipts (including those used for construction equipment). As far as performance bonds go, any contractor applying for this type of letter of credit will need to provide proof they have obtained one before they’ll be able to receive the funds they need.

If you’re to buy a performance bond in Rhode Island, you can expect to pay on average between 5% and 10% of the total amount that’s been committed to your project. This percentage will vary depending on the terms of your contract; for instance, if an agency requires a bond with double or triple coverage then you’ll likely need to pay more in order to get it.

During the construction process, there are three different types of performance bonds that can be used by contractors who fail to complete their projects according to the terms they’ve agreed upon. They are called “pay when paid” bonds, “pay when paid upon notice and demand” bonds, and “pay when paid pending investigation” bonds. All three are designed with specific instructions, which must be so they don’t become invalid; for example, contractors using “pay when paid” bonds are not allowed to make any changes to the terms of their contract once they’ve been approved.

If you would like to purchase a performance bond in Rhode Island, it’s important that you first ensure there is some type of UCC Act coverage available. Your bank or lender may lend you the money required to pay for this type of contract if they’re confident enough that your business will be able to cover all of its expenses. As long as this agreement adheres to, your surety company should approve your request and allow you to move forward with your project smoothly.

Where can I get a performance bond in Rhode Island?

One of the first requirements for becoming a licensed contractor in Rhode Island is to obtain a performance bond. A performance bond ensures your client will receive all contracted services or materials at agreed-upon prices or that you will pay any contract price overruns. It does not protect the homeowner if there are product defects on materials provided by someone else.

Rhode Island law requires payment and performance bonds for construction work on buildings over $10,000, with labor-only being the greater of 50% of the cost of building or $20,000 (RIGL 33-21-8). Additional rules apply to home improvement contracts requiring payment and performance bonds on projects valued at over $1,500 (33-21-8).

Some of the contractors, subcontractors, and suppliers may require a bond as a condition of doing business. The Rhode Island Builders’ Association can provide you with a list of those companies that will need this for their bids. Also, if you have been pre-qualified by a bank or lender for a construction loan or home improvement loan, the lending institution should be able to tell you what bond amounts are required for your project.

Visit Executive Surety Bonds to know more about performance bonds!

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