Exactly what is a Surety Bond - And Why Does it Matter?



This article was written with the professional in mind-- particularly professionals new to surety bonding and public bidding. While there are numerous sort of surety bonds, we're going to be focusing here on contract surety, or the kind of bond you 'd need when bidding on a public works contract/job.

First, be happy that I will not get too mired in the legal lingo included with surety bonding-- at least not more than is required for the purposes of getting the fundamentals down, which is exactly what you desire if you're reading this, probably.

A surety bond is a three celebration contract, one that supplies assurance that a building project will be completed constant with the provisions of the building and construction contract. And what are the 3 celebrations involved, you may ask? Here they are: 1) the professional, 2) the task owner, and 3) the surety company. The surety company, by method of the bond, is providing an assurance to the job owner that if the professional defaults on the job, they (the surety) will action in to make sure that the job is completed, up to the "face amount" of the bond. (face amount generally equals the dollar amount of the contract.) The surety has a number of "solutions" readily available to it for project completion, and they include employing another contractor to finish the job, economically supporting (or "propping up") the defaulting specialist through project completion, and repaying the job owner an agreed amount, as much as the face quantity of the bond.

On openly bid tasks, there are typically three surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The bid bond is submitted with your bid, and it provides guarantee to the task owner (or "obligee" in surety-speak) that you will participate in an agreement and offer 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 job owner with an efficiency bond and a payment bond. The performance bond offers the contract efficiency part of the warranty, detailed in the paragraph simply above this. The payment bond assurances that you, as the general or prime contractor, will pay your subcontractors and suppliers constant with their agreements with you.

It ought to also be kept in mind that this three party arrangement 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 backs up the guarantee as above.

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

It's a requirement-- at least on a lot of publicly quote tasks. If you cannot supply the task owner with bonds, you cannot bid on the task. Construction is a volatile company, and the bonds offer an owner choices (see above) if things spoil on a job. By offering a surety bond, you're informing an owner that a surety company has actually evaluated the fundamentals of your building and construction service, and has chosen that you're certified to bid a particular task.

An important point: Not every contractor is "bondable." Bonding is a credit-based item, suggesting the surety company will closely take a look at the monetary underpinnings of your business. If you do not have the credit, you will not get the bonds. By requiring surety bonds, a project owner can "pre-qualify" professionals and weed out the ones that don't have the capability to complete the job.

How do you get a bond?

Surety companies utilize certified brokers (similar to with insurance coverage) to funnel professionals to them. Your very first stop if you have an interest in getting bonded is to discover a broker that has lots of experience with surety bonds, and this is crucial. A knowledgeable surety broker will not just be able to assist you get the bonds you require, but likewise assist you get certified if you're not there yet.


The surety business, by method of the bond, is supplying a guarantee to the Bonuses 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 quantity" of the bond. On openly bid jobs, there are typically 3 surety bonds you require: 1) the quote bond, 2) performance bond, and 3) payment bond. The bid bond is sent with your quote, and it supplies guarantee to the project owner (or "obligee" in surety-speak) that you will get in into a contract and supply the owner with efficiency and payment bonds if you are the least expensive accountable bidder. If you are granted the contract you will supply the project owner with an efficiency bond and a payment bond. Your very 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 crucial.

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