Most public agencies require that contractors submit a Payment Bond for 100% of the contract amount, and a separate Performance Bond for 100% of the contract amount.
Can Bond Amounts Be Reduced? The amount of the bonds is generally regulated by state or local laws. Sometimes, these laws will permit a public agency to reduce the amount of the bonds. For example, in Washington State, RCW 39.08.030 permits cities and towns to reduce the bond amounts to not less than 25% of the contract amount. If an agency chooses to reduce the amount of the bonds, it should specify the required bond amounts in the bidding documents.
Risks of Reduced Bond Amounts: There are risks, especially in this difficult economic market, of reducing the amount of Performance and Payment bonds. In the event of a default by the contractor or their failure to pay subcontractors, suppliers, and workers, the public agency should ensure maximum protection of the taxpayers' assets.
Bond Premiums Not Affected: When making decisions about whether to issue the bonds to a contractor, bonding companies evaluate the total risk of the project. Generally, the bond premium that contractors pay to sureties for a reduced bond amount is the same as a bond amount for the full contract price. So there's really not a lot of reasons why a public agency should reduce the bond amounts.
Mike Purdy's Public Contracting Blog© 2012 by Michael E. Purdy Associates, LLChttp://PublicContracting.blogspot.com
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