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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:

  • Bid
  • Performance
  • Payment

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.

  • BID 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.
  • PERFORMANCE 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.
  • PAYMENT 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 BOND?
Bonds fee can run from 1% to 4.5%. Bond fees are determined by the surety on an individual basis.