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



This article was written with the specialist in mind-- specifically professionals brand-new to surety bonding and public bidding. While there are many kinds 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 will not get too bogged down in the legal lingo involved with surety bonding-- at least not more than is required for the purposes of getting the essentials down, which is what you want if you're reading this, most likely.

A surety bond is a 3 party agreement, one that provides guarantee that a building task will be completed 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 business. The surety company, by way of the bond, is offering a guarantee to the job owner that if the contractor defaults on the task, they (the surety) will action in to make sure that the task is completed, as much as the "face quantity" of the bond. (face quantity generally equals the dollar amount of the contract.) The surety has several "treatments" readily available to it for task conclusion, and they include employing another professional to end up the task, economically supporting (or "propping up") the defaulting specialist through task completion, and reimbursing the project owner an agreed amount, as much as the face quantity of the bond.

On openly bid tasks, there are usually three surety bonds you need: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The bid bond is submitted 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 most affordable responsible bidder. If you are awarded the agreement you will supply the job owner with a performance bond and a payment bond. The performance bond supplies the agreement efficiency part of the assurance, detailed in the paragraph just above this. The payment bond guarantees that you, as the basic or prime specialist, will pay your subcontractors and suppliers consistent with their agreements with you.

It must also be kept in mind that this 3 party plan can likewise be used to a sub-contractor/general contractor relationship, where the sub provides the GC with bid/performance/payment bonds, if needed, and the surety backs up the assurance as above.

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

It's a requirement-- at least on many publicly quote projects. If you cannot supply the project owner with bonds, you cannot bid on the job. Building and construction is an unstable company, and the bonds offer an owner options (see above) if things spoil on a job. By offering a surety bond, you're browse around this site telling an owner that a surety company has actually reviewed the fundamentals of your construction company, and has decided that you're qualified to bid a particular job.

A crucial point: Not every contractor is "bondable." Bonding is a credit-based item, meaning the surety company will carefully examine the financial foundations of your business. If you do not have the credit, you won't get the bonds. By requiring surety bonds, a task owner can "pre-qualify" contractors and weed out the ones that don't have the capability to end up the job.

How do you get a bond?

Surety business use licensed brokers (much like with insurance coverage) to funnel professionals 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 crucial. A skilled 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 company, by way of the bond, is supplying a guarantee to the task owner that if the specialist defaults on the task, 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 generally three surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The bid bond is submitted with your quote, and it offers assurance to the task owner (or "obligee" in surety-speak) that you will get in into a contract and supply the owner with performance and payment bonds if you are the lowest responsible bidder. If you are granted the agreement you will offer 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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