Definition and Benefits of Surety Bonds
A surety bond is simply an agreement between three parties:
Principal: the person who needs the bond
Obligee: the person who is protected by the bond, such as the government entity
Surety: the person who issues the bond
Relieves the project owner of risks of financial loss as a result of liens for unpaid subcontractors and suppliers. They also protect taxpayer money for public projects.
Transition between construction of the site and permanent financing is smooth because there are no liens.
Surety company can offer assistance such as technical, managerial and financial – to move the project along and reduce the chance of default (project failure).
Surety company arranges for project completion, if the contractor defaults.
Types of Surety Bonds
Bid Bond – provides financial assurance that the bid has been submitted in good faith. The contractor intends to fulfill his/her responsibilities at the price bid and will provide necessary performance and payment bonds.
Performance Bond – protects the project owner from financial loss if the contractor fails to perform the duties outlined in the contract.
Payment Bond – guarantees that the contractor will pay subcontractors and laborers, and for supplies relating to the project at hand.
Obtaining a Bond
Before a surety can provide assurance that a contractor can perform properly, they must go through the prequalification process. In this process, the surety conducts a review known as underwriting – analyzing the contractor’s business operations and determining their ability to meet current and future contractual obligations. The surety will not issue a bond until they are satisfied that the contractor can fulfill his/her contractual obligations. The surety looks at the items listed on the slide during the prequalification process.
Costs of Bonds
The charge for a bond, or the bond premium, is broken down as such: no charge for the bid bond, 0.5 to 2 percent of the contract amount for the performance bond and no charge for the payment bond when purchased with the performance bond. In addition, there is a fee for surety’s underwriting services known as the surety bond premium.
Utilize these resources when receiving bids:
U.S. Department of Treasury: www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm
State Insurance Department: www.naic.org/state_web_map.htm
Surety Information Office: http://sio.org or call 202-686-7463