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



This article was written with the specialist in mind-- specifically contractors brand-new to surety bonding and public bidding. While there are lots of 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.

Initially, be grateful that I won't get too stuck in the legal jargon involved with surety bonding-- a minimum of not more than is required for the purposes of getting the basics down, which is exactly what you want if you're reading this, most likely.

A surety bond is a three party agreement, one that provides assurance that a building job will be finished constant with the provisions of the building and construction agreement. And exactly what are the three parties included, you may ask? Here they are: 1) the professional, 2) the job owner, and 3) the surety company. The surety business, by method of the bond, is supplying 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. (face quantity generally equates to the dollar quantity of the contract.) The surety has several "solutions" offered to it for job completion, and they consist of working with another contractor to complete the project, economically supporting (or "propping up") the defaulting professional through project conclusion, and repaying the task owner an agreed amount, as much as the face quantity of the bond.

On publicly bid jobs, there are generally 3 surety bonds you require: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The quote bond is submitted with your bid, and it offers guarantee 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 awarded the agreement you will provide the job owner with an efficiency bond and a payment bond. The performance bond supplies the agreement performance part of the warranty, detailed in the paragraph just above this. The payment bond assurances that you, as the general or prime professional, will pay your subcontractors and suppliers constant with their contracts with you.

It should also be kept in mind that this 3 party arrangement can likewise be used to a sub-contractor/general professional relationship, where the sub offers the GC with bid/performance/payment bonds, if required, and the surety supports the guarantee as above.

OK, great, so exactly 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 many publicly quote tasks. If you cannot provide the project owner with bonds, you can't bid on the task. Building is an unpredictable organisation, and the bonds offer an owner alternatives (see above) if things go bad on a task. By providing a surety bond, you're informing an owner that a surety business has examined the fundamentals of your construction business, and has decided that you're certified to bid a specific job.

A crucial point: Not every professional is "bondable." Bonding is a credit-based product, suggesting the surety business will closely take a look at the monetary foundations of your company. If you do not have the credit, you won't get the bonds. By needing surety bonds, a job owner can "pre-qualify" contractors and weed out the ones that do not have the capacity to end up the task.

How do you get a bond?

Surety companies utilize certified brokers (similar to with insurance coverage) to funnel contractors to them. Your very first stop if you're interested in getting bonded is to find a broker that has great deals of experience with surety bonds, and this is essential. A skilled surety broker will not just be able to help you get the bonds you need, but also help you get qualified if you're not quite there.


The surety business, by method of the bond, is providing an assurance to the job owner that if the professional defaults on the job, they (the surety) will step in to make sure that the task is completed, up to the "face quantity" of the bond. On openly bid jobs, there are generally three surety bonds you require: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The quote bond is submitted with your quote, and it supplies guarantee to the project owner (or "obligee" in surety-speak) that you will get in into an agreement and supply the owner with performance and payment bonds if you are the most affordable responsible 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 Look At This broker that has lots of experience with surety bonds, and this is important.

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