Still accepting new clients! Call (866) 681-2140

Construction Company Bonds

  • Home
  • Construction Company Bonds

Construction Company Bonds

Introduction

Construction companies play a pivotal role in infrastructure development and economic growth. However, these companies often face stringent regulatory requirements, particularly when it comes to securing bonds for construction projects. One critical aspect of these requirements is the need for financial statement audits or reviews. This article aims to elucidate which cities in the United States mandate such audits or reviews for construction companies and the specific laws that regulate these requirements. By understanding these regulations, construction companies can better navigate the complexities of compliance and ensure their financial statements meet the necessary standards.

There are different types of bonds that construction companies may need to secure. These bonds are typically required to ensure various aspects of the construction project, from project completion to financial obligations. Here are the main types of construction bonds:

1. Bid Bonds

  • Purpose: Ensures that the contractor who wins the bid will enter into the contract and provide the required performance and payment bonds.
  • Requirement: Usually required during the bidding process.
  • Protection: Protects the project owner from losing the difference between the low bid and the next lowest bid if the winning bidder fails to honor their bid.

2. Performance Bonds

  • Purpose: Guarantees that the contractor will complete the project according to the terms of the contract.
  • Requirement: Often required for government and large-scale private projects.
  • Protection: Protects the project owner against financial loss if the contractor fails to complete the project.

3. Payment Bonds

  • Purpose: Ensures that the contractor will pay their subcontractors, laborers, and material suppliers.
  • Requirement: Typically required alongside performance bonds.
  • Protection: Provides protection to subcontractors and suppliers from non-payment.

4. Maintenance Bonds

  • Purpose: Guarantees that the contractor will correct any defects in workmanship or materials for a specified period after the project is completed.
  • Requirement: Often required in addition to performance and payment bonds.
  • Protection: Provides assurance to the project owner that any post-completion issues will be addressed.

5. Subdivision Bonds

  • Purpose: Ensures that developers will make certain improvements to public property, such as streets, sidewalks, and sewers.
  • Requirement: Usually required by municipalities before approving a new subdivision project.
  • Protection: Protects the municipality and future homeowners by ensuring the infrastructure improvements will be completed.

6. Supply Bonds

  • Purpose: Guarantees that suppliers will deliver materials or equipment as per the contract terms.
  • Requirement: Used in contracts where timely and proper delivery of supplies is critical.
  • Protection: Ensures that the project will not be delayed due to failure in supply delivery.

7. License and Permit Bonds

  • Purpose: Required by government agencies for contractors to obtain necessary licenses or permits.
  • Requirement: Necessary for compliance with local, state, or federal regulations.
  • Protection: Ensures that the contractor will adhere to laws and regulations related to their work.

Financial Statement Audit or Review Requirements

Financial statement audits or reviews are essential for construction companies seeking surety bonds. These bonds act as a guarantee to project owners that the construction company will fulfill its contractual obligations. The financial statement audit provides the highest level of assurance that the financial statements are accurate and free from material misstatements. A review, while less comprehensive than an audit, still offers a moderate level of assurance through analytical procedures and inquiries.

Regulatory Framework

The regulatory framework for financial statement audits or reviews for bonds is governed by both federal and state laws. Key federal regulations include the Sarbanes-Oxley Act, which establishes auditing and financial regulations for companies, and the IRS guidelines that dictate the financial reporting requirements. At the state level, regulations vary, with each state implementing its own version of the “Little Miller Act” based on the federal Miller Act, which mandates performance and payment bonds for public construction projects.

In addition, different cities in the United States have varying requirements for audits or reviews of financial statements when construction companies seek bonds. These requirements ensure the financial stability of the companies and the successful completion of construction projects. 

Common Requirement Types

  1. Threshold Amounts for Bonds: Different cities may set specific financial thresholds that determine when an audit or review is necessary. For instance, a city might require audited financial statements for all bonds exceeding $1 million.
  2. Unaudited Financial Report: Typically required for smaller projects or companies with lower revenue.
  3. CPA Review Report: Provides limited assurance and is required for mid-sized projects or companies.
  4. CPA Audited Financial Statement: Offers the highest level of assurance and is required for large projects or companies with significant revenue.

Obligations

Construction companies involved in all scales of projects might need to fulfill audit or review obligations for several reasons. These reasons primarily relate to the need for the below subjects:

  • Financial transparency and credibility, 
  • Risk management; 
  • Regulatory compliance; 
  • Securing bonds and financing; 
  • Assurance to stakeholders; and 
  • Enhanced decision-making abilities.
  • Large Contractors: Firms handling multi-million dollar projects.
  • Medium Contractors: Companies engaged in projects ranging from $500,000 to $2.5 million, depending on the city’s requirements.
  • Small Contractors: Although generally not required to undergo audits, small contractors may need reviewed financial statements for smaller bond requirements.

Process Steps for Audit or Review of Financial Statements

  1. Preparation: All relevant financial documents including balance sheets, income statements, and cash flow statements should be gathered.
  2. Engagement: A Certified Public Accountant (CPA) experienced in construction accounting should be consulted to. Dimov Tax is ready to assist with your specific needs in different locations.
  3. Compilation: The CPA compiles the financial information and prepares for the audit or review.
  4. Review: For reviews, the CPA performs analytical procedures and inquiries to ensure there are no material modifications.
  5. Audit: For audits, the CPA conducts a thorough examination of financial records, tests account balances and verifies internal controls.
  6. Report Issuance: Upon completion, the CPA issues a report detailing their findings and the level of assurance provided.
  7. Submission: The audited or reviewed financial statements should be submitted to the relevant regulatory body or bonding company.

Services Provided by Dimov Tax & CPA Services

Dimov Tax & CPA Services offers comprehensive support for construction companies needing financial statement audits or reviews:

  • Audit Services: Full-scale audits that provide the highest level of assurance.
  • Review Services: Reviews offer a moderate level of assurance.
  • Consultation: Expert advice on preparing for audits or reviews.
  • Financial Statement Preparation: Assistance in compiling financial data according to GAAP.
  • Compliance Assistance: Ensuring all financial statements meet federal, state and city regulations.
  • Tax Services: Comprehensive tax planning and compliance services tailored to construction companies.

Conclusion

Understanding the audit and review requirements for financial statements is crucial for construction companies aiming to secure bonds and undertake large projects. By adhering to the regulatory standards set forth by state and federal bodies, companies can ensure their financial health and compliance. Dimov Tax & CPA Services stands ready to assist construction companies of all scales in every different location, in meeting these requirements, providing the expertise and support necessary to navigate the complexities of financial audits and reviews.

Need to speak to an expert?

Call us today at (833) 829-1120, email us at info@dimovtax.com, or fill out the form and we’ll get in touch immediately.

"*" indicates required fields

Name*
✓ Valid number ✕ Invalid number
Hidden

Award-winning global customer service.

5/5

Dimov Tax is rated 5 stars on all major review platforms including Google, Yelp, Facebook, Angie’s List, Better Business Bureau, TaxBuzz, Thumbtack, Upwork, Bark, and much more.