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



This short article was composed with the specialist in mind-- particularly professionals 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 sort of bond you 'd need when bidding on a public works contract/job.

Be happy that I won't get too mired in the legal lingo involved 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, most likely.

A surety bond is a 3 party contract, one that provides assurance that a building project will be finished constant with the provisions of the building and construction contract. And what are the 3 parties involved, 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 an assurance to the job owner that if the specialist defaults on the project, they (the surety) will action in to make sure that the project is finished, as much as the "face amount" of the bond. (face amount generally equals the dollar amount of the agreement.) The surety has numerous "solutions" readily available to it for project conclusion, and they include working with another professional to finish the job, economically supporting (or "propping up") the defaulting professional through task completion, and reimbursing the job owner an agreed quantity, up to the face amount of the bond.

On openly bid jobs, there are normally 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 job 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 accountable bidder. If you are granted the contract you will provide the task owner with an efficiency bond and a payment bond. The performance bond offers the contract performance part more info of the warranty, detailed in the paragraph simply above this. The payment bond warranties that you, as the general or prime specialist, will pay your subcontractors and suppliers consistent with their agreements with you.

It needs to likewise be kept in mind that this 3 celebration arrangement can also be used to a sub-contractor/general contractor relationship, where the sub provides the GC with bid/performance/payment bonds, if needed, and the surety stands behind the assurance as above.

OK, excellent, so what's the point of all this and why do you need the surety assurance in very first place?

It's a requirement-- at least on the majority of openly quote jobs. If you can't provide the task owner with bonds, you can't bid on the task. Building is a volatile organisation, and the bonds offer an owner alternatives (see above) if things spoil on a job. Also, by providing a surety bond, you're informing an owner that a surety business has evaluated the basics of your building business, and has decided that you're certified to bid a specific task.

A crucial point: Not every contractor is "bondable." Bonding is a credit-based product, suggesting the surety business will closely analyze the monetary foundations of your business. If you do not have the credit, you will not get the bonds. By requiring 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 (similar to with insurance coverage) to funnel contractors to them. Your very 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 crucial. A knowledgeable surety broker will not only be able to assist you get the bonds you require, but likewise help you get qualified if you're not quite there.


The surety business, by way of the bond, is providing a guarantee to the task owner that if the contractor defaults on the task, they (the surety) will step in to make sure that the task is completed, up to the "face quantity" of the bond. On publicly bid projects, there are normally three surety bonds you need: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The bid bond is sent with your bid, and it offers assurance to the job owner (or "obligee" in surety-speak) that you will get in into an agreement and offer the owner with performance and payment bonds if you are the least expensive accountable bidder. If you are awarded 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 discover a broker that has lots of experience with surety bonds, and this is crucial.

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