What is retention?
Before diving straight into retention bonds, we’ll define some important terms. “Retention” is financial security a contractor can hold to ensure subcontractors complete their contractual obligations. OR project owners/employers can have this financial security to guarantee a contractor’s performance.
Retention can also protect another party financially if a contractor’s or subcontractor’s work is defective and they don’t fix the mistake.
Since many contractors work on projects with slim profit margins (say, 2.5%), a 5% retention can result in a cash loss until a project is completed.
What is retainage?
Another important term in the construction business is “retainage.” Retainage is the portion (usually 5-10%) of a contract’s price that’s withheld until a project is complete. This portion is held as security for either the project owner or contractor – ensuring that contractors or subcontractors complete projects according to contracts. Retainage also safeguards against defects that may be discovered after project completion.
Retainage will be released once a project is successfully completed, which means construction businesses may operate at a loss until then. That’s where “retention bonds” come in.
Get Your Retention Bond:
- A retention bond allows a contractor to receive their entire profit. It’s used in place of cash retention.
- Retention bonds are a logical solution when the bond premium costs less than the retainage.
- There are two types of retention bonds: conditional (default) and unconditional (on-demand).
- Credit history, work experience, and financial stability all play a role in annual premium rates for this type of bond.
What is a retention bond in construction?
A retention bond is a type of construction bond or, more specifically, a type of performance bond. An employer can deduct retentions at the start of a project as usual but will be willing to release the retention if a bond is in place.
A retention bond allows a contractor to receive their entire profit. It’s used in lieu of cash retention. Employers are willing to accept retention bonds because they’re backed by reputable surety providers. Employers are also guaranteed cash if their contractor fails to fulfill their contractual obligations.
Who needs a retention bond?
If you don’t want your employer to withhold cash retention, you can opt to pay for a retention bond instead. Your surety bond premiums will replace the retainage funds. Then if there’s an issue with your work or project, your client will benefit from the bond. They can file a claim against the bond for any losses they suffer due to project incompletion or defects.
Retention bonds are a logical solution when the bond premium costs less than the retainage. As a contractor or subcontractor, you can obtain a retention bond either before a project begins or during a project. Posting the bond during the project can be beneficial if you wish to acquire any retainage that has built up from the start.
How do retention bonds work?
A retention bond is a three-party agreement involving a principal, an obligee, and a surety.
- Principal: The contractor or subcontractor that purchases the bond
- Obligee: The client or employer that benefits from the bond if a contractor’s work is incomplete or defective
- Surety: The company that issues the bond and backs it financially in case of claims
A retention bond is beneficial to the principal and the obligee. It allows the principal to take hold of retainage funds. It also protects the obligee if a project goes sideways.
If the principal breaks the bond agreement, the obligee can file a claim. The surety may step in to settle the claim immediately, but the principal must later repay the surety in full.
Retention Bond vs. Performance Bond: When do I need both?
A performance bond ensures contractors complete projects according to contracts – on time and within budget. A retention bond allows contractors to take hold of the full value of their cash rather than it being withheld throughout a project’s duration.
If you’re a contractor, a retention bond offers your clients financial protection (and peace of mind) while simultaneously improving your financial standing.
Frequently Asked Questions
Like other performance bonds, retention bonds typically cost around 1-3% of the contract’s total value. Your credit history, work experience, and financial stability will play a role in your annual premium rate. Contact ZipBonds if you have any questions.
There are two kinds of retention bonds:
- Conditional (default) bonds: The surety agrees to pay the obligee only if there’s a breach in the contract or another form of default. The surety requires proof before paying out a claim on a conditional bond.
- Unconditional (on-demand) bonds: The surety agrees to pay the obligee on-demand – regardless of whether a contractual default is proven.
Contractors and subcontractors can maintain a steady cash flow rather than a partial payment. Retention bonds offer greater financial stability for construction businesses, resulting in lower chances of defaulting. These bonds also have expiration dates, releasing contractors (and surety companies) from their obligations at a specific time.
Apply for Your Retention Bond Today
ZipBonds gives you the fastest and most secure option for getting bonded. Our all-digital platform is intuitive and straightforward. Apply online, email firstname.lastname@example.org, or call (888) 435-4191 to speak with an agent directly.
Founders Ryan Swalve and Zach Mefferd formed the vision for ZipBonds.com when they realized how overly complicated it was to help clients place surety. The frustration of being unable to incorporate the technology they’d used in other insurance-focused projects left them thinking “there has to be a better way.”
Fast forward a couple of years, and that better way is the impetus of everything we do at ZipBonds. We constantly look for innovative ways to improve the bonding process for our clients and agents. Our team comprises individuals who understand all angles of surety – for companies, agencies, and individuals. Incorporating everyone’s point of view to improve the process while simultaneously integrating cutting-edge technology is what sets our business apart.