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



This 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 will not get too stuck in the legal lingo included with surety bonding-- at least not more than is needed for the functions of getting the fundamentals down, which is exactly what you desire if you're reading this, most likely.

A surety bond is a 3 celebration agreement, one that provides guarantee that a building and construction project will be finished consistent 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 project owner, and 3) the surety business. The surety company, by method of the bond, is providing a warranty to the job owner that if the contractor defaults on the task, they (the surety) will step in to make sure that the task is finished, as much as the "face amount" of the bond. (face amount usually equals the dollar quantity of the agreement.) The surety has several "solutions" available to it for task conclusion, and they include hiring another contractor to complete the task, financially supporting (or "propping up") the defaulting professional through task conclusion, and compensating the job owner an agreed amount, as much as the face quantity of the bond.

On openly bid tasks, there are generally 3 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 supplies assurance to the project owner (or "obligee" in surety-speak) that you will participate in a contract 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 project owner with an efficiency bond and a payment bond. The performance bond supplies the contract efficiency part of the guarantee, detailed in the paragraph simply above this. The payment bond assurances that you, as the basic or prime professional, will pay your subcontractors and providers consistent with their contracts with you.

It must also be noted that this three party arrangement can likewise be applied to a sub-contractor/general professional relationship, where the sub offers the GC with bid/performance/payment bonds, if needed, and the surety guarantees 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?

Initially, it's a requirement-- at least on a lot of publicly quote tasks. If you cannot supply the job owner with bonds, you cannot bid on the task. Building and construction is an unstable company, and the bonds give an owner choices (see above) if things go bad on a job. Also, by supplying a surety bond, you're telling an owner that a surety business has actually examined the principles of your building and construction service, and has actually chosen that you're certified to bid a specific Go Here job.

An important point: Not every professional is "bondable." Bonding is a credit-based item, suggesting the surety business will closely examine the financial underpinnings of your business. If you do not have the credit, you will not get the bonds. By needing surety bonds, a task owner can "pre-qualify" contractors and weed out the ones that don't have the capacity to finish the job.

How do you get a bond?

Surety companies utilize licensed brokers (similar to with insurance coverage) to funnel professionals to them. Your first stop if you have an interest in getting bonded is to discover a broker that has great deals of experience with surety bonds, and this is very important. A knowledgeable surety broker will not just be able to help you get the bonds you need, but also help you get certified if you're not quite there.


The surety company, by method of the bond, is supplying a warranty to the task owner that if the professional defaults on the job, they (the surety) will step in to make sure that the project is completed, up to the "face quantity" of the bond. On openly bid jobs, there are typically three surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The quote bond is submitted with your bid, and it supplies guarantee to the project owner (or "obligee" in surety-speak) that you will enter 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 agreement you will provide the project owner with an efficiency bond and a payment bond. Your very 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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