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



This short article was composed with the specialist in mind-- particularly contractors brand-new to surety bonding and public bidding. While there are numerous type of surety bonds, we're going to be focusing here on agreement surety, or the type of bond you 'd need 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 provides guarantee that a construction job will be finished consistent with the provisions of the building contract. And what are the 3 celebrations involved, you may ask? Here they are: 1) the specialist, 2) the project owner, and 3) the surety company. The surety company, by way of the bond, is providing a guarantee to the project owner that if the specialist defaults on the job, they (the surety) will step in to make sure that the task is finished, as much as the "face quantity" of the bond. (face quantity normally equates to the dollar amount of the agreement.) The surety has several "treatments" available to it for project completion, and they include employing another professional to complete the project, economically supporting (or "propping up") the defaulting specialist through job completion, and compensating the project owner an agreed quantity, approximately the face quantity of the bond.

On publicly bid projects, there are generally 3 surety bonds you require: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The bid bond is submitted with your bid, and it provides assurance to the project owner (or "obligee" in surety-speak) that you will enter into a contract and offer the owner with efficiency and payment bonds if you are the most affordable accountable bidder. If you are awarded the agreement you will offer the job owner with a performance bond and a payment bond. The efficiency bond provides the contract performance part of the assurance, detailed in the paragraph simply above this. The payment bond guarantees that you, as the basic or prime specialist, will pay your subcontractors and suppliers constant with their agreements with you.

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

OK, terrific, so what's the point of all this and why do you require the surety assurance in first location?

It's a requirement-- at least on most publicly bid projects. If you cannot provide the project owner with bonds, you can't bid on the task. Building is an unstable service, and the bonds provide an owner alternatives (see above) if things go bad on a task. By supplying a surety bond, you're informing an owner that a surety business has actually evaluated the principles of your construction service, and has chosen that you're qualified to bid a specific task.

An important point: Not every specialist is "bondable." Bonding is a credit-based item, suggesting the surety company will carefully take a look at the monetary underpinnings of your company. If you do not have the credit, you won't get the bonds. By requiring surety bonds, a task owner can "pre-qualify" professionals and weed out the ones that don't have the capacity to end up the job.

How do you get a bond?

Surety companies utilize certified brokers (much like with insurance coverage) to funnel contractors to them. Your first stop if you have an interest in getting bonded is to discover a broker that has lots of experience with surety bonds, and this is essential. A knowledgeable surety broker will not only have the ability to assist you get the bonds you require, however likewise assist you get qualified if you're not quite there yet.


The surety company, by way 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 job is completed, up to the "face quantity" of the bond. On openly bid jobs, there are normally 3 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 offers 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 most affordable responsible bidder. If you are granted the agreement you will offer the job owner with a performance bond and a payment bond. Your very first YOURURL.com stop if you're interested in getting bonded is to discover a broker that has lots of experience with surety bonds, and this is essential.

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