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



This article was composed with the professional in mind-- particularly contractors new to surety bonding and public bidding. While there are many type 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 thankful that I will not get too stuck in the legal lingo involved with surety bonding-- a minimum of not more than is needed for the functions of getting the fundamentals down, which is exactly what you want if you read this, probably.

A surety bond is a 3 party contract, one that supplies assurance that a building and construction job will be finished consistent with the provisions of the building and construction contract. And what are the 3 celebrations included, 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 supplying a guarantee to the job owner that if the specialist 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 equates to the dollar quantity of the agreement.) The surety has numerous "remedies" offered to it for job conclusion, and they consist of working with another contractor to finish the project, financially supporting (or "propping up") the defaulting professional through job conclusion, and repaying the task owner an agreed quantity, approximately the face quantity of the bond.

On openly bid tasks, there are usually 3 surety bonds you require: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The quote bond is sent with your bid, and it offers assurance to the project owner (or "obligee" in surety-speak) that you will participate in a contract and provide the owner with efficiency and payment bonds if you are the lowest accountable bidder. If you are granted the agreement you will offer the project owner with a performance bond and a payment bond. The efficiency bond supplies the contract performance part of the warranty, detailed in the paragraph simply above this. The payment bond warranties that you, as the basic or prime professional, will pay your subcontractors and providers 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 contractor relationship, where the sub offers the GC with bid/performance/payment bonds, if required, and the surety supports the warranty as above.

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

It's a requirement-- at least on many openly bid jobs. If you can't supply the project owner with bonds, you can't bid on the task. Construction is a volatile business, and the bonds offer an owner choices (see above) if things spoil on a task. Also, by offering a surety bond, you're telling an owner that a surety business has examined the fundamentals of your building and construction organisation, and has actually decided that you're qualified to bid a specific job.

A crucial point: Not every professional is "bondable." Bonding is a credit-based item, indicating the surety business will carefully analyze the monetary underpinnings of your company. If you don't have the credit, you won't get the bonds. By needing surety bonds, a task owner can "pre-qualify" specialists and weed out the ones that do not have the capability to finish the job.

How do you get a bond?

Surety companies use licensed brokers (much like with insurance) to funnel specialists to them. Your first stop if you're interested in getting bonded is to discover a broker that has great deals of experience with surety bonds, and this is very important. A knowledgeable surety broker will not only be able to assist you get the bonds you need, however likewise assist you get qualified if you're not quite there.


The surety company, by method of the bond, is supplying an assurance to the job owner that if the contractor 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 openly bid tasks, there are generally 3 surety bonds you need: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The bid bond is submitted with your bid, and it supplies assurance to the task owner (or "obligee" .. [read more] in surety-speak) that you will enter into an agreement and supply the owner with performance and payment bonds if you are the lowest accountable bidder. If you are granted the contract you will supply the job owner with a performance 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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