An increasing number of contractors are obtaining surety bonds and enjoying the multiple benefits granted by them. A contractor with a surety bond has been judged capable of fulfilling the obligations laid out in the bond. Surety bonds help contractors maintain solid relationships with their clients.
Surety bonds are almost always required before work can begin on public projects, especially those which are federally funded, but private project developers can also require contractors to file certain types of surety bonds before work can begin on their projects.
This video highlights key benefits contractors have through surety bonds. In addition to providing contractors financial and technical support, your surety can also provide guidance advice and professional services to help you increase your bonding capacity. With surety bonds, a contractor’s assets are not tied up since no tangible security is required, thus allowing reinvestment in expanding their business.
Watch this video to learn more about how surety bonds can benefit contractors.
Surety bonds are commonly required to manage the risk associated with construction projects. They are an agreement which ensures a contract will be completed should the contractor be unable to do so. There are mainly three types of contract surety bonds, which are:
Bid bond: Also known as a bid guaranty or bid surety, the bid bond is an assurance from a third party (an insurance company or bank) in written form to the client by the contractor (bidder) with a bid. This bond guarantees the contractor will enter into the project for the price quoted in the bid. This builds trust in the bidding company where they will become more likely to have their bids accepted in the future.
Performance bond: A performance bond assures a client the contractor is capable of performing the project. It protects the client from loss by providing legal and financial protection.
Payment bond: A payment bond is another important type of surety bond which guarantees the contractor will pay the sub-contractors, suppliers, and laborers who are working on the project.
Surety bonds are generally approved by the surety only when they are confident the contractor is qualified to perform the contract and is financially sound to withstand the assorted risks involved in the completion of the given construction project.
A surety bond is the best way to ensure a contract will be completed per the agreed upon terms. There are three main parties involved in a bonded contract, the obligee (client), the principal (an individual or business) and the surety (insurance company). An obligee is the person who required the bond, principal is the individual or company that needs to purchase the bond and the surety is the insurance company that backs the bond.
Surety bonding is required by companies which need permit bonds before they get their business licenses. Moreover, construction professionals are often required to obtain contract bonds before they can work on various projects. To make it simpler, a surety bond is required to protect the obligee against any losses incurred due to the principal’s failure to meet the obligation. However, it is mandatory for any federally-financed construction project valued at more than $150,000 to purchase surety bonds. Similar requirements exist for various state projects as well.
Companies with adequate working capital and cash flow to complete a project and good past performance history are candidates and should apply for a surety bond facility.