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



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

Initially, be appreciative that I won't get too stuck in the legal jargon included with surety bonding-- at least not more than is required for the purposes of getting the basics down, which is exactly what you want if you read this, most likely.

A surety bond is a 3 celebration agreement, one that supplies assurance that a building and construction job will be completed consistent with the arrangements of the building agreement. And what are the three celebrations included, you may ask? Here they are: 1) the contractor, 2) the job owner, and 3) the surety business. The surety company, by way of the bond, is supplying a guarantee to the project owner that if the professional defaults on the project, they (the surety) will step in to make sure that the job is finished, up to the "face amount" of the bond. (face amount normally equates to the dollar quantity of the contract.) The surety has several "treatments" offered to it for task conclusion, and they consist of hiring another contractor to finish the job, financially supporting (or "propping up") the defaulting professional through job conclusion, and compensating the job owner an agreed amount, up to the face amount of the bond.

On publicly bid projects, there are typically three surety bonds you need: 1) the bid bond, 2) efficiency bond, and 3) payment bond. The bid bond is submitted with your bid, and it provides assurance to the project owner (or "obligee" in surety-speak) that you will get in into an agreement and supply the owner with efficiency and payment bonds if you are the least expensive accountable bidder. If you are awarded the contract you will provide the task owner with an efficiency bond and a payment bond. The performance bond provides the agreement efficiency part of the assurance, detailed in the paragraph just above this. The payment bond guarantees that you, as the basic or prime specialist, will pay your subcontractors and suppliers consistent with their agreements with you.

It must also be kept in mind that this 3 party anchor 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 stands behind the warranty as above.

OK, fantastic, so what's the point of all this and why do you require the surety guarantee in very first place?

It's a requirement-- at least on most openly bid jobs. If you can't provide the project owner with bonds, you can't bid on the job. Construction is an unpredictable company, and the bonds offer an owner options (see above) if things spoil on a job. By supplying a surety bond, you're telling an owner that a surety business has actually reviewed the basics of your building and construction business, and has chosen that you're certified 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 analyze the monetary foundations of your company. If you don't have the credit, you won't get the bonds. By requiring surety bonds, a task owner can "pre-qualify" professionals and weed out the ones that don't have the capacity to complete the task.

How do you get a bond?

Surety business utilize certified brokers (similar to with insurance) to funnel specialists to them. 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 very important. A knowledgeable surety broker will not just be able to help you get the bonds you need, however likewise assist 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 finished, up to the "face quantity" of the bond. On publicly bid projects, there are generally three 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 offers guarantee to the project owner (or "obligee" in surety-speak) that you will get in 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 contract you will supply the task owner with a performance 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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