How Do Surety Bonds Work?

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A surety bond is a contractual agreement between a project owner, contractor and a surety company to ensure the project will be completed as per contract terms. Be it federal construction project or a service contract, contractors are required to obtain surety bonds from surety bonding companies. After performing a rigorous pre-qualification process and analyzing the contractor’s financial position, a surety issues the bond to the project owner. Here are various types of surety bonds which may be issued.

  • A Bid Bond assures the contractor will enter into a contract for the price quoted in his bid. This bond prevents the contractor from increasing the bid price on the project after entering into a contract with a project owner or not entering into the project if low.
  • A Performance Bond guarantees the contractor will perform the work as per the terms of the contract.
  • A Payment Bond guarantees the contractor will pay all suppliers and subcontractors as per the terms of the contract.
  • A Maintenance Bond guarantees the contractor will solve all maintenance issues during a specified maintenance period after the completion of the project.
  • A Warranty Bond assures the contractor will repair any defects in the project during the warranty period.

The surety company calculates the surety bond cost based on the contract amount based on the contractor’s financial credentials. Most surety bonds don’t require collateral or security but a contractor must pay bond premiums. Once a contractor obtains a surety bond, the surety company assures the contractor will perform the contract, and this increases the contractor’s ability to obtain work.