WHAT IS THE PURPOSE OF
THE SURETY BOND?
The surety guarantees to the owner (obligee) that the contractor
or sub-contractor (principal) will perform per terms and conditions
as specified under his/her contract. Bonding transfers the
risk of contractor default to the surety company
WHAT IS SURETY BONDING?
Surety is an extension of credit. Surety is not insurance,
although state insurance commissioners regulate it.
WHAT ARE THE TYPES OF SURETY BONDS?
Three common types of bonds associated with a contractor bid:
WHAT DO THESE BONDS GUARANTEE?
Prime Contractors include the cost of a surety bond in their
bid. Often it is a separate line item, but if it isn't then
it becomes part of mobilization or overhead.
BONDS are issued as a percentage of the bid amount.
The Bid Bond guarantees that the contractor will enter
into a contract, if it is awarded to them.
BONDS secure the contractor's contractual obligation
that the project will be completed in accordance with
plans and specifications. Performance bonds are generally
issued for 100% of the contract amount.
BONDS protect certain subcontractors and suppliers
who have furnished labor or material to the contractor
for use on the bonded job, against non-payment. Payment
bonds are generally issued for 100% of the contract amount.
WHO NEEDS A BOND?
Almost all-sizable public construction projects and some service
contracts require bonding. States, counties and municipalities
have similar requirements in their statutes. Likewise, many
private sector owners and general contractors require surety
bonds, to protect their respective interests, although not
legally bound to do so.
WHO PROVIDES A BOND?
A licensed surety company provides a surety bond. Surety companies
are generally a division of an insurance company and are regulated
by State Insurance Commissions.
HOW DOES A CONTRACTOR
OBTAIN A BOND?
The contractor (principal) needs to provide a surety agent
background information for a on the company, its key personnel,
prior construction experiences and financial statements for
a bonding assessment
by the insurance company. A surety underwriter, much like
a lending officer at a bank, will evaluate, ask questions
and determine the level of credit the surety wishes to extend.
WHO PAYS FOR THE BOND?
Prime contractors include the cost of a surety bond in their
bid. Often it is a separate line item but if it is not then
it becomes part of mobilization or overhead. The subcontractor
should find out if a bond will be required before submitting
their bid. The bond fee should be included in their final
bid to the general contractor.
WHAT IS THE COST OF A
Bonds fee can run from 1% to 4.5%. Bond fees are determined
by the surety on an individual basis.