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



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

Initially, be grateful that I will not get too bogged down in the legal jargon included with surety bonding-- at least not more than is required for the purposes of getting the essentials down, which is what you desire if you're reading this, more than likely.

A surety bond is a three celebration agreement, one that offers guarantee that a building task will be completed constant with the arrangements of the building agreement. And what are the three celebrations included, you may ask? Here they are: 1) the contractor, 2) the task owner, and 3) the surety company. The surety business, by method of the bond, is providing an assurance to the task owner that if the contractor defaults on the job, 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 usually equals the dollar amount of the agreement.) The surety has numerous "solutions" available to it for job completion, and they consist of working with another specialist to end up the project, financially supporting (or "propping up") the defaulting contractor through job conclusion, and reimbursing the task owner an agreed amount, up to the face amount of the bond.

On publicly bid projects, there are typically three surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The bid bond is sent with your quote, and it supplies guarantee to the job owner (or "obligee" in surety-speak) that you will participate in an agreement and offer the owner with performance and payment bonds if you are the most affordable responsible bidder. If you are awarded the contract you will provide the job owner with a performance bond and a payment bond. The performance bond provides 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 professional, will pay your subcontractors and suppliers consistent with their agreements with you.

It must also be noted that this 3 celebration arrangement 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 top place?

First, it's a requirement-- a minimum of on many openly bid projects. If you cannot supply the task owner with bonds, you can't bid on the task. Construction is an unpredictable company, and the bonds provide an owner options (see above) check out here if things spoil on a task. Also, by providing a surety bond, you're informing an owner that a surety company has actually reviewed the basics of your building and construction service, and has actually decided that you're certified to bid a specific job.

An important point: Not every contractor is "bondable." Bonding is a credit-based item, suggesting the surety business will closely examine the financial foundations of your business. If you do not have the credit, you will not get the bonds. By needing surety bonds, a project owner can "pre-qualify" contractors and weed out the ones that don't have the capacity to complete the job.

How do you get a bond?

Surety companies use licensed brokers (much like with insurance) to funnel professionals to them. Your 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 very important. A skilled surety broker will not just have the ability to help you get the bonds you need, but also assist you get certified if you're not quite there yet.


The surety business, by way of the bond, is providing a guarantee to the project owner that if the contractor defaults on the project, they (the surety) will step in to make sure that the project is finished, up to the "face quantity" of the bond. On publicly bid projects, there are usually 3 surety bonds you need: 1) the bid bond, 2) efficiency 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 efficiency 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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