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 numerous sort of surety bonds, we're going to be focusing here on agreement surety, or the sort of bond you 'd require when bidding on a public works contract/job.

Initially, be glad that I will not get too mired in the legal lingo involved with surety bonding-- a minimum of not more than is needed for the purposes of getting the basics down, which is what you desire if you read this, most likely.

A surety bond is a 3 party contract, one that offers guarantee that a building project will be finished consistent with the provisions of the construction agreement. And what are the three parties involved, you may ask? Here they are: 1) the contractor, 2) the task owner, and 3) the surety business. The surety company, by way of the bond, is providing a warranty to the job owner that if the contractor defaults on the job, they (the surety) will action in to make sure that the project is finished, as much as the "face amount" of the bond. (face quantity usually equates to the dollar quantity of the agreement.) The surety has several "solutions" offered to it for job completion, and they consist of employing another professional to complete the job, financially supporting (or "propping up") the defaulting specialist through project completion, and reimbursing the task owner an agreed amount, up to the face amount of the bond.

On openly bid jobs, there are generally 3 surety bonds you need: 1) the bid bond, 2) efficiency 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 participate in a contract and supply the owner with performance and payment bonds if you are the most affordable accountable bidder. If you are granted the contract you will offer the task owner with an efficiency bond and a payment bond. The efficiency bond supplies the contract performance part of the assurance, detailed in the paragraph just above this. The payment bond warranties that you, as the basic or prime professional, will pay your subcontractors and suppliers constant with their agreements with you.

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

OK, great, so exactly what's the point of all this and why do you need the surety warranty in very first place?

Initially, it's a requirement-- at least on the majority of publicly quote jobs. If you can't supply the task owner with bonds, you can't anchor bid on the task. Building is a volatile service, and the bonds give an owner alternatives (see above) if things spoil on a job. By providing a surety bond, you're informing an owner that a surety business has examined the fundamentals of your building and construction business, and has chosen that you're certified to bid a particular job.

An essential point: Not every specialist is "bondable." Bonding is a credit-based product, implying the surety business will carefully take a look at the monetary underpinnings of your company. If you don't have the credit, you won't 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 to end up the job.

How do you get a bond?

Surety companies utilize licensed brokers (much like with insurance) to funnel contractors 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 essential. An experienced surety broker will not only be able to assist you get the bonds you need, but likewise help you get certified if you're not rather there.


The surety business, by way of the bond, is providing 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 project is completed, up to the "face amount" of the bond. On openly bid projects, there are usually 3 surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The quote bond is submitted with your bid, and it supplies assurance to the project owner (or "obligee" 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 awarded the contract you will supply the task owner with an efficiency bond and a payment bond. Your first stop if you're interested in getting bonded is to discover a broker that has lots of experience with surety bonds, and this is crucial.

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