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



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

First, be grateful that I will not get too bogged down in the legal jargon involved with surety bonding-- a minimum of not more than is required for the functions of getting the fundamentals down, which is exactly what you want if you're reading this, more than likely.

A surety bond is a 3 party contract, one that supplies assurance that a construction project will be finished constant with the arrangements of the building agreement. And what are the three celebrations involved, you may ask? Here they are: 1) the contractor, 2) the job owner, and 3) the surety company. The surety company, by way of the bond, is supplying an assurance to the project owner that if the specialist defaults on the task, they (the surety) will action in to make sure that the project is completed, up to the "face amount" of the bond. (face quantity usually equals the dollar amount of the agreement.) The surety has several "remedies" available to it for job conclusion, and they include employing another specialist to complete the project, economically supporting (or "propping up") the defaulting professional through task conclusion, and repaying the project owner an agreed quantity, as much as the face amount of the bond.

On openly bid jobs, there are generally 3 surety bonds you need: 1) the quote bond, 2) performance bond, and 3) payment bond. The quote bond is submitted with your quote, and it provides guarantee to the project owner (or "obligee" in surety-speak) that you will enter into a contract and offer the owner with efficiency and payment bonds if you are the lowest accountable bidder. If you are granted the agreement you will provide the task owner with a performance bond and a payment bond. The efficiency bond offers the contract efficiency part of the assurance, detailed in the paragraph just above this. The payment bond assurances that you, as the basic or prime specialist, will pay your subcontractors and providers constant with their agreements with you.

It needs to also be noted that this three celebration plan can also be used to a sub-contractor/general contractor relationship, where the sub supplies the GC with bid/performance/payment bonds, if needed, 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 warranty in top place?

It's a requirement-- at least on most publicly bid projects. If you cannot provide the job owner with bonds, you can't bid on the job. Building and construction is an unpredictable company, and the bonds offer an owner options (see above) if things go bad on a task. By supplying a surety bond, you're telling an owner that a surety company has actually examined the fundamentals of your building organisation, and has decided that you're certified to bid a specific task.

An important point: Not every professional is "bondable." Bonding is a credit-based item, suggesting the surety business will carefully take a look at the financial underpinnings of your company. If you do not have the credit, you will not get the bonds. By requiring surety bonds, a job owner can "pre-qualify" specialists and weed out the ones that do not have the capability browse around these guys to finish the task.

How do you get a bond?

Surety companies utilize licensed brokers (similar to with insurance) to funnel professionals 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 important. A knowledgeable surety broker will not just be able to assist you get the bonds you need, but also help you get qualified if you're not rather there.


The surety company, by method of the bond, is offering a guarantee to the project owner that if the professional 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 tasks, there are normally three surety bonds you need: 1) the quote bond, 2) performance bond, and 3) payment bond. The bid bond is sent with your quote, and it supplies assurance to the task 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 lowest responsible bidder. If you are granted the contract you will provide 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 important.

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