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



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

First, be appreciative that I won't get too mired in the legal jargon involved with surety bonding-- at least not more than is needed for the functions of getting the essentials down, which is exactly what you desire if you read this, more than likely.

A surety bond is a three party agreement, one that provides assurance that a building task will be finished constant with the arrangements of the building contract. And exactly what are the three celebrations involved, you may ask? Here they are: 1) the professional, 2) the task owner, and 3) the surety company. The surety business, by method of the bond, is providing a warranty to the task owner that if the contractor defaults on the project, they (the surety) will step in to make sure that the job is finished, up to the "face amount" of the bond. (face amount typically equals the dollar amount of the agreement.) The surety has a number of "remedies" readily available to it for project completion, and they consist of hiring another professional to finish the task, economically supporting (or "propping up") the defaulting professional through job completion, and repaying the task owner an agreed quantity, approximately the face amount of the bond.

On publicly bid tasks, there are normally 3 surety bonds you require: 1) the bid bond, 2) performance bond, and 3) payment bond. The quote bond is submitted with your quote, and it provides assurance 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 lowest accountable bidder. If you are awarded the contract you will offer the project owner with an efficiency bond and a payment bond. The efficiency bond provides the contract efficiency part of the assurance, detailed in (visit site) the paragraph simply above this. The payment bond warranties that you, as the basic or prime specialist, will pay your subcontractors and suppliers constant with their agreements with you.

It must also be kept in mind that this three party plan can also be used to a sub-contractor/general professional relationship, where the sub offers the GC with bid/performance/payment bonds, if needed, and the surety stands behind the assurance as above.

OK, excellent, so what's the point of all this and why do you need the surety assurance in first location?

It's a requirement-- at least on the majority of publicly quote projects. If you can't supply the project owner with bonds, you can't bid on the task. Building and construction is a volatile service, and the bonds provide an owner alternatives (see above) if things spoil on a task. By providing a surety bond, you're telling an owner that a surety company has actually examined the basics of your building service, and has actually decided that you're certified to bid a specific job.

An important point: Not every contractor is "bondable." Bonding is a credit-based product, implying the surety business will carefully analyze the financial underpinnings of your company. If you don't have the credit, you will not get the bonds. By requiring surety bonds, a job owner can "pre-qualify" contractors and weed out the ones that don't have the capability to end up the task.

How do you get a bond?

Surety companies use certified brokers (similar to with insurance coverage) to funnel professionals to them. Your very first stop if you're interested in getting bonded is to find a broker that has great deals of experience with surety bonds, and this is necessary. A skilled surety broker will not just be able to help you get the bonds you require, however also assist you get certified if you're not quite there.


The surety business, by method of the bond, is supplying a guarantee to the project owner that if the contractor defaults on the job, they (the surety) will step in to make sure that the project is completed, up to the "face amount" of the bond. On openly bid projects, there are generally three surety bonds you require: 1) the bid bond, 2) performance bond, and 3) payment bond. The bid bond is sent with your bid, and it provides assurance to the project owner (or "obligee" in surety-speak) that you will enter into an agreement and provide the owner with performance and payment bonds if you are the least expensive accountable bidder. If you are awarded the contract you will supply the project owner with a performance bond and a payment bond. Your first stop if you're interested in getting bonded is to find a broker that has lots of experience with surety bonds, and this is important.

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