Surety Bonds for Heavy Civil Engineering

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March 9, 2023

Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.

What Do Civil Engineers Do?

According to the U.S. Department of Labor, heavy and civil engineering is considered a subsector of the construction sector. The Occupational Outlook Handbook published by the Bureau of Labor Statistics describes the role of civil engineers as “[To] conceive, design, build, supervise, operate, construct and maintain infrastructure projects and systems in the public and private sector, including roads, buildings, airports, tunnels, dams, bridges, and systems for water supply and sewage treatment.” Their work is not normally performed on buildings but rather on infrastructure.

IIJA and Heavy Civil Engineering

The Infrastructure Improvement and Jobs Act (IIJA) was signed into law by President Biden on November 15, 2021. It authorized $1.2 trillion in funding for transportation and infrastructure projects, with $550 billion of that figure allocated for “new” investments and programs. The remainder is earmarked for repairs and upgrades to existing transportation and infrastructure systems. This level of funding creates unprecedented opportunities for heavy civil engineering contractors.

Construction Bonding Requirements for Heavy Civil Engineering Contractors

Since 1935, construction contractors of all sorts have been required to furnish the owners of public works projects with certain surety bonds. This requirement was established by the federal Miller Act for projects funded by the federal government. Similar legislation, referred to as “Little Miller Acts,” was passed by individual states and mandated surety bonds for projects funded by state governments. The IIJA includes its own rule requiring bonding of construction contractors, including heavy civil engineering contractors, for projects funded by IIJA grants.

How Do Construction Bonds Work?

Every construction bond is a legally binding contract involving three parties: the project owner (known as the “obligee”), the contractor (referred to as the “principal”), and the bond’s guarantor (called the “surety”). Each of these parties has certain responsibilities under the terms of the surety bond agreement:

The obligee establishes the required bond amount, also known as the bond’s “penal sum” and has the right to file a claim for compensation of damages up to that amount resulting from the principal’s violation of the terms of the bond.
The principal is legally obligated to pay all valid claims against the surety bond.
The surety sets the premium rate for the bond and investigates all claims to establish their validity.

In agreeing to guarantee a construction bond, the surety actually agrees to lend the principal the funds to pay a valid claim if necessary. The usual practice is for the surety to send payment directly to the claimant, the obligee, and then be reimbursed by the principal within a certain length of time.

How Much Do Construction Bonds Cost?

Construction bonds are sold for an annual premium that is calculated by multiplying the bond’s penal sum by the premium rate. The obligee sets the penal sum, typically for the full amount of the construction contract. And the surety assigns the premium rate for each bond based on an underwriting assessment that considers the scope of the contract and the principal’s industry experience and personal and business financial strength and stability. The higher the principal’s personal credit score, the lower the risk that the surety won’t be repaid for claims paid on the principal’s behalf, and the lower the premium rate.

Types of Construction Bonds Required

The construction bonds required for heavy civil engineering contractors working on infrastructure projects financed with IIJA grant money are performance bonds and payment bonds, which may be separate or combined into one surety bond.

A performance bond is the principal’s guarantee to operate in accordance with all applicable laws and building codes and complete the project according to the terms of the construction contract.
A payment bond is the principal’s guarantee to pay suppliers, subcontractors, and workers as set forth in the payment schedule included in the construction contract.
Some project owners may also require a bid bond, which is the principal’s agreement to accept the job chosen as the winning bidder. A bid bond also guarantees that the principal is qualified for and can furnish the required performance and payment bonds.
And in states where heavy civil engineering contractors must be licensed at the state level, a contractor license bond may also be required.

Any heavy civil engineering contractor bidding on projects financed with federal funds should carefully consider building sufficient bonding capacity.