What is a Surety Bond - And Why Does it Matter?
This article was composed with the professional in mind-- specifically professionals new to surety bonding and public bidding. While there are many sort of surety bonds, we're going to be focusing here on agreement surety, or the kind of bond you 'd require when bidding on a public works contract/job.
First, be appreciative that I won't get too bogged down in the legal jargon included with surety bonding-- at least not more than is required for the purposes of getting the essentials down, which is what you desire if you're reading this, more than likely.
A surety bond is a 3 party agreement, one that provides guarantee that a construction task will be completed consistent with the arrangements of the building agreement. And exactly what are the three celebrations included, you may ask? Here they are: 1) the professional, 2) the task owner, and 3) the surety company. The surety company, by method of the bond, is supplying a guarantee to the job owner that if the specialist defaults on the project, they (the surety) will step in to make sure that the job is finished, approximately the "face amount" of the bond. (face amount normally equates to the dollar quantity of the contract.) The surety has numerous "remedies" offered to it for task completion, and they include hiring another professional to complete the task, economically supporting (or "propping up") the defaulting specialist through task completion, and reimbursing the project owner an agreed amount, up to the face amount of the bond.
On publicly bid projects, there are generally three surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The quote bond is sent with your bid, and it supplies assurance to the project owner (or "obligee" in surety-speak) that you will participate in an agreement and supply the owner with efficiency and payment bonds if you are the lowest responsible bidder. If you are awarded the agreement you will supply the project owner with an efficiency bond and a payment bond. The performance bond offers the agreement performance part of the warranty, detailed in the paragraph just above this. The payment bond guarantees that you, as the general or prime specialist, will pay your subcontractors and suppliers consistent with their contracts with you.
It should also be kept in mind that this 3 party arrangement can also be applied to a sub-contractor/general contractor relationship, where the sub supplies the GC with bid/performance/payment bonds, if needed, and the surety backs up the warranty as above.
OK, terrific, so exactly what's the point of all this and why do you need the surety warranty in top place?
Initially, it's a requirement-- at least on the majority of openly bid jobs. If you can't provide the project owner with bonds, you cannot bid on the job. Building is an unstable service, and the bonds provide an owner choices (see above) if things spoil on a job. By providing a surety bond, you're telling an owner that a surety business has actually reviewed the basics of your building and construction company, and has actually chosen that you're qualified to bid a particular job.
An essential point: Not every specialist is "bondable." Bonding is a credit-based product, suggesting the surety company will closely analyze the financial foundations of your company. If you do not have the credit, you will not get the bonds. By needing surety bonds, a task owner can "pre-qualify" contractors and weed out the ones that don't have the capacity 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 have an interest in getting bonded is to discover a broker that has great deals of experience with surety bonds, and this is very important. An experienced surety broker will not just have the ability to help you get the bonds you need, but also assist you get certified if you're not there yet.
The surety company, by way 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 usually 3 surety bonds you need: 1) the quote bond, 2) performance bond, and 3) payment bond. The quote bond is sent with your bid, and it provides guarantee to the job owner (or "obligee" in surety-speak) that you will enter into an agreement and provide the Do you agree owner with efficiency and payment bonds if you are the least expensive accountable bidder. If you are awarded the agreement you will supply the job owner with a performance bond and a payment bond. 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 important.