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



This post was composed with the professional 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 kind of bond you 'd require when bidding on a public works contract/job.

Be glad that I won't get too stuck in the legal jargon included with surety bonding-- at least not more than is needed for the functions of getting the basics down, which is what you desire if you're reading this, most likely.

A surety bond is a three celebration agreement, one that offers guarantee that a construction job will be finished consistent with the arrangements of the construction contract. And exactly what are the three parties included, you may ask? Here they are: 1) the specialist, 2) the task owner, and 3) the surety company. The surety business, by method of the bond, is providing a guarantee to the job owner that if the specialist defaults on the project, they (the surety) will step in to make sure that the job is finished, approximately the "face quantity" of the bond. (face quantity normally equates to the dollar amount of the contract.) The surety has a number of "treatments" readily available to it for project completion, and they include employing another professional to end up the task, economically supporting (or "propping up") the defaulting specialist through task conclusion, and reimbursing the project owner an agreed amount, up to the face amount of the bond.

On openly bid tasks, there are generally three surety bonds you require: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The quote bond is sent with your bid, and it offers assurance to the project owner (or "obligee" in surety-speak) that you will participate in an agreement and supply the owner with efficiency and payment bonds if you are the most affordable accountable bidder. If you are awarded the contract you will provide the project owner with a performance bond and a payment bond. The efficiency bond supplies the contract performance part of the guarantee, detailed in the paragraph simply above this. The payment bond assurances that you, as the general or prime contractor, will pay your subcontractors and providers constant with their contracts with you.

It must also be kept in mind that this 3 party arrangement can likewise be applied to a sub-contractor/general contractor relationship, where the sub supplies the GC with bid/performance/payment bonds, if needed, and the surety guarantees the guarantee as above.

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

Initially, it's a requirement-- at least on a lot of publicly quote jobs. If you can't supply the task owner with bonds, you can't bid on the task. Building is an unpredictable service, and the bonds give an owner choices (see above) if things spoil on a job. By supplying a surety bond, you're telling an owner that a surety company has examined the fundamentals of your building organisation, and has decided that you're qualified to bid a specific task.

An essential point: Not every contractor is "bondable." Bonding is a credit-based product, implying the surety business will closely examine the financial underpinnings of your company. If you don't have the credit, you won't get the bonds. By needing surety bonds, a job owner can "pre-qualify" professionals and weed out the ones that do not have the capacity to finish 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 essential. A skilled surety broker will not only be able to help you get the bonds you need, however likewise assist you get qualified if you're not there yet.


The surety business, by way of the bond, is providing an assurance to the job owner that if the professional defaults on the project, they (the surety) will step in to make active sure that the task is finished, up to the "face quantity" of the bond. On publicly bid projects, there are usually 3 surety bonds you need: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The bid bond is sent with your quote, and it provides assurance to the project owner (or "obligee" in surety-speak) that you will enter into a contract and supply the owner with efficiency and payment bonds if you are the least expensive accountable bidder. If you are awarded the agreement you will supply the job owner with an efficiency bond and a payment bond. 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 crucial.

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