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



This article was written with the contractor in mind-- particularly specialists brand-new to surety bonding and public bidding. While there are lots of 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 thankful that I won't get too mired in the legal jargon involved with surety bonding-- at least not more than is required for the functions of getting the essentials down, which is what you desire if you're reading this, most likely.

A surety bond is a three party contract, one that provides guarantee that a building and construction project will be completed constant with the arrangements of the building contract. And exactly what are the 3 parties involved, you may ask? Here they are: 1) the professional, 2) the task owner, and 3) the surety company. The surety business, by way of the bond, is offering a warranty to the project owner that if the specialist defaults on the task, they (the surety) will action in to make sure that the job is completed, up to the "face amount" of the bond. (face amount typically equates to the dollar amount of the agreement.) The surety has several "treatments" available to it for task completion, and they include working with another contractor to end up the project, economically supporting (or "propping up") the defaulting professional through task completion, and reimbursing the job owner an agreed amount, approximately the face amount of the bond.

On openly bid jobs, there are typically three surety bonds you need: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The bid bond is sent with your quote, and it offers guarantee to the task 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 granted the agreement you will provide the task owner with an efficiency bond and a payment bond. The performance bond supplies the contract performance part of the guarantee, detailed in the paragraph just above this. The payment bond assurances that you, as the basic or prime professional, will pay your subcontractors and providers consistent with their agreements with you.

It ought to also be noted that this 3 party arrangement can also be applied to a sub-contractor/general specialist relationship, where the sub provides the GC with bid/performance/payment bonds, if required, and the surety backs up the warranty as above.

OK, fantastic, so exactly what's the point of all this Check Out Your URL and why do you need the surety assurance in first location?

First, it's a requirement-- a minimum of on many publicly quote jobs. If you cannot provide the project owner with bonds, you can't bid on the task. Building and construction is an unstable business, and the bonds provide an owner alternatives (see above) if things go bad on a task. Also, by supplying a surety bond, you're informing an owner that a surety company has evaluated the basics of your construction service, and has actually decided that you're certified to bid a particular task.

A crucial point: Not every professional is "bondable." Bonding is a credit-based item, suggesting the surety company will carefully examine the monetary underpinnings of your business. If you don't have the credit, you won't get the bonds. By needing surety bonds, a task owner can "pre-qualify" specialists and weed out the ones that don't have the capability to finish the task.

How do you get a bond?

Surety business utilize licensed brokers (just like with insurance) to funnel specialists 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 very important. A skilled surety broker will not just be able to help you get the bonds you require, but also assist you get certified if you're not rather there.


The surety business, by method of the bond, is providing a warranty to the project owner that if the professional defaults on the job, they (the surety) will step in to make sure that the project is finished, up to the "face amount" of the bond. On publicly bid jobs, there are generally 3 surety bonds you need: 1) the quote bond, 2) performance bond, and 3) payment bond. The bid bond is submitted with your bid, and it provides guarantee 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 most affordable responsible bidder. If you are granted the contract you will supply the project owner with an efficiency bond and a payment bond. Your very 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 important.

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