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



This post was composed with the contractor in mind-- particularly specialists brand-new to surety bonding and public bidding. While there are numerous type of surety bonds, we're going to be focusing here on contract surety, or the type of bond you 'd require when bidding on a public works contract/job.

Be thankful that I will not get too bogged down in the legal jargon included with surety bonding-- at least not more than is needed for the functions of getting the essentials down, which is what you desire if you're reading this, most likely.

A surety bond is a three celebration contract, one that provides guarantee that a construction task will be completed constant with the provisions of the building and construction contract. And exactly 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 business, by way of the bond, is supplying a guarantee to the job owner that if the specialist defaults on the job, they (the surety) will action in to make sure that the project is finished, as much as the "face quantity" of the bond. (face quantity normally equals the dollar amount of the contract.) The surety has a number of "remedies" available to it for job completion, and they include employing another specialist to complete the task, economically supporting (or "propping up") the defaulting professional through job conclusion, and compensating the task owner an agreed amount, approximately the face quantity of the bond.

On openly bid jobs, there are normally three surety bonds you need: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The quote bond is submitted with your quote, and it provides assurance to the task 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 contract you will supply the task owner with an efficiency bond and a payment bond. The efficiency bond supplies the agreement efficiency part of the assurance, detailed in the paragraph just above this. The payment bond assurances that you, as the basic or prime professional, will pay your subcontractors and suppliers constant with their agreements with you.

It must also be kept in mind that this 3 party arrangement can also be applied 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 guarantee as above.

OK, terrific, so exactly what's the point of all this and why do you need the surety guarantee in top place?

It's a requirement-- at least on most openly bid projects. If you can't provide the task owner with bonds, you can't bid on the task. Building and construction is a volatile company, and the bonds give an owner options (see above) if things go bad on a job. By offering a surety bond, you're informing an owner that a surety business has actually reviewed the basics of your construction company, and has actually chosen that you're certified to bid a specific task.

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

How do you get a bond?

Surety business use licensed brokers (much like with insurance coverage) to funnel specialists 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 essential. A skilled surety broker will not only be able to help you get the bonds you require, but likewise help you get check out this site certified if you're not quite there.


The surety business, by method of the bond, is providing an assurance to the project owner that if the professional defaults on the task, 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 projects, there are typically 3 surety bonds you require: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The quote bond is submitted with your bid, and it provides assurance to the job owner (or "obligee" in surety-speak) that you will enter into a contract and offer the owner with performance and payment bonds if you are the most affordable accountable bidder. If you are granted the agreement you will supply the task 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 essential.

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