What is a Surety Bond - And Why Does it Matter?
This article was written with the professional in mind-- specifically contractors new to surety bonding and public bidding. While there are lots of kinds of surety bonds, we're going to be focusing here on agreement surety, or the sort of bond you 'd require when bidding on a public works contract/job.
Initially, be happy that I won't get too stuck in the legal lingo involved with surety bonding-- a minimum of not more than is needed for the functions of getting the basics down, which is exactly what you want if you read this, probably.
A surety bond is a 3 party contract, one that provides assurance that a building and construction job will be finished consistent with the arrangements of the 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 warranty to the project owner that if the professional defaults on the job, they (the surety) will step in to make sure that the job is finished, as much as the "face quantity" of the bond. (face quantity generally equals the dollar quantity of the agreement.) The surety has several "remedies" readily available to it for job completion, and they consist of employing another professional to complete the project, economically supporting (or "propping up") the defaulting contractor through task conclusion, and repaying the task owner an agreed quantity, approximately the face quantity of the bond.
On publicly bid tasks, there are generally 3 surety bonds you require: 1) the quote bond, 2) efficiency bond, and 3) payment bond. The quote bond is sent with your bid, and it offers assurance to the project owner (or "obligee" in surety-speak) that you will participate in a contract and supply the owner with efficiency and payment bonds if you are the most affordable responsible bidder. If you are granted the agreement you will provide the project owner with a performance bond a knockout post and a payment bond. The efficiency bond supplies the agreement performance part of the guarantee, detailed in the paragraph simply 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 ought to also be kept in mind that this three party plan can also be used to a sub-contractor/general specialist relationship, where the sub offers the GC with bid/performance/payment bonds, if required, and the surety backs up the warranty as above.
OK, excellent, so exactly what's the point of all this and why do you need the surety warranty in first place?
Initially, it's a requirement-- at least on the majority of publicly quote projects. If you cannot supply the task owner with bonds, you can't bid on the task. Building is a volatile service, and the bonds give an owner choices (see above) if things spoil on a job. By offering a surety bond, you're informing an owner that a surety company has actually reviewed the basics of your construction organisation, and has actually decided that you're qualified to bid a particular job.
An important point: Not every contractor is "bondable." Bonding is a credit-based item, meaning the surety business will carefully take a look at the monetary underpinnings of your business. If you don't have the credit, you will not get the bonds. By requiring surety bonds, a project owner can "pre-qualify" professionals and weed out the ones that do not have the capability to complete the job.
How do you get a bond?
Surety companies use licensed brokers (similar to with insurance) to funnel professionals to them. Your very first stop if you're interested in getting bonded is to find a broker that has great deals of experience with surety bonds, and this is essential. A knowledgeable surety broker will not only have the ability to help you get the bonds you need, however also assist you get certified if you're not there yet.
The surety company, by method of the bond, is supplying a guarantee to the job owner that if the specialist defaults on the job, they (the surety) will step in to make sure that the job is completed, up to the "face quantity" of the bond. On openly bid projects, 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 offers assurance to the task owner (or "obligee" in surety-speak) that you will enter into a contract and provide the owner with efficiency and payment bonds if you are the lowest accountable bidder. If you are granted the agreement you will offer the project owner with an efficiency 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 important.