What is a Surety Bond - And Why Does it Matter?



This article was composed with the contractor in mind-- specifically professionals new to surety bonding and public bidding. While there are lots of type of surety bonds, we're going to be focusing here on agreement surety, or the type of bond you 'd require when bidding on a public works contract/job.

Be grateful that I won't get too bogged down in the legal lingo involved with surety bonding-- at least not more than is needed for the functions of getting the essentials down, which is what you desire if you're reading this, most likely.

A surety bond is a 3 party agreement, one that supplies guarantee that a building job will be completed consistent with the arrangements of the building and construction agreement. And exactly what are the 3 parties involved, you may ask? Here they are: 1) the professional, 2) the task owner, and 3) the surety business. The surety business, by method of the bond, is supplying a warranty to the job owner that if the specialist defaults on the job, they (the surety) will action in to make sure that the job is completed, as much as the "face amount" of the bond. (face amount normally equates to the dollar quantity of the agreement.) The surety has a number of "remedies" readily available to it for job conclusion, and they include employing another specialist to complete the project, financially supporting (or "propping up") the defaulting contractor through task conclusion, and repaying the project owner an agreed amount, as much as the face quantity of the bond.

On publicly bid jobs, there are typically 3 surety bonds you need: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The bid bond is sent with your quote, and it offers guarantee to the project owner (or "obligee" in surety-speak) that you will enter into a contract and supply the owner with efficiency and payment bonds if you are the most affordable accountable bidder. If you are granted the agreement you will provide the project owner with an efficiency bond and a payment bond. The efficiency bond offers the contract performance part of the guarantee, detailed in the paragraph simply above this. The payment bond warranties that Credit Risk Insurance Premium Brokers you, as the general or prime specialist, will pay your subcontractors and providers consistent with their contracts with you.

It must also be kept in mind that this 3 celebration plan can also be applied to a sub-contractor/general professional relationship, where the sub provides the GC with bid/performance/payment bonds, if required, and the surety supports the guarantee as above.

OK, great, so exactly what's the point of all this and why do you require the surety assurance in first place?

It's a requirement-- at least on many openly quote jobs. If you can't supply the project owner with bonds, you can't bid on the task. Building is an unpredictable company, and the bonds provide an owner choices (see above) if things go bad on a task. Also, by offering a surety bond, you're telling an owner that a surety company has actually evaluated the basics of your building service, and has chosen that you're certified to bid a particular job.

A crucial point: Not every contractor is "bondable." Bonding is a credit-based item, implying the surety company will closely examine the financial foundations of your business. If you don't have the credit, you will not get the bonds. By needing surety bonds, a job owner can "pre-qualify" specialists and weed out the ones that don't have the capacity to complete the job.

How do you get a bond?

Surety business utilize licensed brokers (similar to with insurance coverage) to funnel contractors to them. Your first stop if you have an interest in getting bonded is to find a broker that has great deals of experience with surety bonds, and this is essential. A skilled surety broker will not just be able to assist you get the bonds you need, however likewise help you get qualified if you're not there yet.


The surety business, by method of the bond, is providing a guarantee to the task owner that if the professional defaults on the project, they (the surety) will step in to make sure that the task is finished, up to the "face amount" of the bond. On publicly bid tasks, there are usually 3 surety bonds you require: 1) the quote bond, 2) performance bond, and 3) payment bond. The bid bond is submitted with your bid, and it supplies assurance to the task owner (or "obligee" in surety-speak) that you will get in into an agreement and offer the owner with performance and payment bonds if you are the lowest accountable bidder. If you are granted the agreement you will provide the project owner with a performance bond and a payment bond. Your very first stop if you're interested in getting bonded is to discover a broker that has lots of experience with surety bonds, and this is important.

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