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



This post was written with the professional in mind-- particularly professionals new to surety bonding and public bidding. While there are many kinds of surety bonds, we're going to be focusing here on agreement surety, or the kind of bond you 'd need when bidding on a public works contract/job.

Be appreciative that I won't get too bogged down in the legal jargon 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, most likely.

A surety bond is a three party agreement, one that supplies assurance that a building and construction project will be finished consistent with the provisions of the construction agreement. And exactly what are the 3 celebrations included, you may ask? Here they are: 1) the specialist, 2) the task owner, and 3) the surety company. The surety business, by way of the bond, is supplying an assurance 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 completed, up to the "face quantity" of the bond. (face quantity usually equals the dollar quantity of the agreement.) The surety has numerous "remedies" readily available to it for job completion, and they include employing another specialist to finish the job, financially supporting (or "propping up") the defaulting contractor through task completion, and reimbursing the job owner an agreed amount, as much as the face amount of the bond.

On publicly bid tasks, there are normally 3 surety bonds you need: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The bid bond is sent with your quote, and it provides guarantee to the task owner (or "obligee" in surety-speak) that you will enter into an agreement and supply the owner with efficiency and payment bonds if you are the lowest accountable bidder. If you are awarded the agreement you will offer the project owner with an efficiency bond and a payment bond. The performance bond supplies the agreement performance part of the assurance, detailed in the paragraph just above this. The payment bond guarantees that you, as the basic or prime contractor, will pay your subcontractors and providers consistent with their agreements with you.

It needs to likewise be noted that this 3 celebration plan can also be applied to a sub-contractor/general specialist relationship, where the sub offers the GC with bid/performance/payment bonds, if required, and the surety supports the warranty as above.

OK, excellent, so exactly what's the point of all this and why do you need the surety guarantee in first location?

It's a requirement-- at least on the majority of publicly bid jobs. If you cannot supply the job owner with bonds, you can't bid on the job. Building and construction is a volatile check my reference business, and the bonds offer an owner options (see above) if things go bad on a task. Likewise, by providing a surety bond, you're telling an owner that a surety business has actually examined the basics of your construction company, and has actually decided that you're qualified to bid a particular job.

An essential point: Not every specialist is "bondable." Bonding is a credit-based item, meaning the surety company will closely take a look at the monetary underpinnings of your business. If you do not have the credit, you will not get the bonds. By needing surety bonds, a project owner can "pre-qualify" contractors and weed out the ones that don't have the capability to finish the job.

How do you get a bond?

Surety business use licensed brokers (similar to with insurance coverage) to funnel specialists to them. Your first stop if you have an interest in getting bonded is to find a broker that has lots of experience with surety bonds, and this is necessary. A knowledgeable surety broker will not only be able to assist you get the bonds you need, however also help you get certified if you're not there yet.


The surety company, by method of the bond, is offering a guarantee to the task owner that if the contractor defaults on the project, they (the surety) will step in to make sure that the task is finished, up to the "face quantity" of the bond. On publicly bid jobs, there are typically three surety bonds you require: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The quote bond is sent with your quote, and it supplies assurance to the job owner (or "obligee" in surety-speak) that you will get in into an agreement and provide the owner with efficiency and payment bonds if you are the most affordable responsible bidder. If you are awarded the contract you will offer the project owner with a performance bond and a payment bond. Your 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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