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



This article was written with the contractor 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 require when bidding on a public works contract/job.

First, be happy that I will not get too bogged down in the legal lingo included with surety bonding-- at least not more than is required for the purposes of getting the fundamentals down, which is what you desire if you're reading this, more than likely.

A surety bond is a three party agreement, one that provides guarantee that a construction task will be completed consistent with the arrangements of the building agreement. And what are the three celebrations involved, you may ask? Here they are: 1) the contractor, 2) the job 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 task is finished, up to the "face quantity" of the bond. (face quantity usually equates to the dollar quantity of the contract.) The surety has numerous "solutions" available to it for task completion, and they include hiring another professional to finish the task, economically supporting (or "propping up") the defaulting professional through task completion, and repaying the task owner an agreed quantity, up to the face amount of the bond.

On publicly bid projects, there are normally three surety bonds you require: 1) the bid bond, 2) performance bond, and 3) payment bond. The bid bond is submitted with your bid, and it supplies guarantee to the job owner (or "obligee" in surety-speak) that you will participate in a contract and offer the owner with performance and payment bonds if you are the most affordable responsible bidder. If you are awarded the agreement you will supply the task owner with a performance bond and a payment bond. The performance bond offers the agreement performance part of the warranty, detailed in the paragraph simply above this. The payment bond warranties that you, as the basic or prime specialist, will pay your subcontractors and providers constant with their agreements with you.

It must also be noted that this three party plan can also be used to a sub-contractor/general specialist relationship, where the sub offers the GC with bid/performance/payment bonds, if needed, and the surety supports the warranty as above.

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

It's a requirement-- at least on many publicly quote jobs. If you cannot provide the task owner with bonds, you can't bid on the task. Building is an unstable business, and the bonds provide an owner options (see above) if things spoil on a job. Likewise, by supplying a surety bond, you're telling an owner that a surety company has examined the principles of your building and construction service, and has actually decided that you're certified to bid a specific job.

An essential point: Not every specialist is "bondable." Bonding is a credit-based item, implying the surety company will closely examine the financial underpinnings of your company. If you don't have the credit, you won't get the bonds. By requiring surety bonds, a job owner can "pre-qualify" professionals and weed out the ones that don't have the capacity to end up the task.

How do you get a bond?

Surety companies utilize licensed brokers (just like with insurance coverage) to funnel contractors to them. Your first stop if you're interested in getting bonded is to discover a broker that has great deals of experience with surety bonds, and this is necessary. A knowledgeable surety broker will not only have the ability to help you get the bonds you need, but likewise check out the post right here assist you get certified if you're not there yet.


The surety company, by method 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 sure that the project is finished, up to the "face quantity" of the bond. On publicly bid projects, there are normally 3 surety bonds you need: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The bid bond is submitted with your quote, and it supplies assurance to the job owner (or "obligee" in surety-speak) that you will enter into an agreement and provide the owner with performance and payment bonds if you are the most affordable accountable bidder. If you are awarded the agreement you will offer the project owner with an efficiency bond and a payment bond. Your 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 essential.

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