What is a Surety Bond?
Construction can be a risky profession but a surety bond can be the most comprehensive risk management strategy available in this industry because they assure the project owner that the job will be completed.
Simply put, a surety bond is an agreement between three parties. A surety agreement involves the principal (you), the surety (our surety provider), and the obligee (the person or group requiring the bond). The surety financially guarantees to an obligee that you, the principal, assure the obligee that the job will be completed.
Although they are vital in completing a project quickly and efficiently, an unqualified contractor can have a negative impact on the overall project. To combat these risks, learn more about obtaining surety bonds to shift subcontractor failure liabilities onto a surety company.
Now that we have answered the question “What is a surety bond?”, it’s important to note that there are a number of different types of bonds, each with its own unique set of requirements.
Types of Surety Bonds
The three most common type of surety bonds include:
- Bid Bond – provides financial assurance that the bid has been submitted in good faith. The contractor intends to fulfill his or her responsibilities at the price bid and will provide the 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.
- Labour and Material Payment Bond – guarantees that the contractor will pay subcontractors and labourers, and for supplies relating to the project at hand.
Benefits of a Surety Bond
Like all forms of insurance, a surety bond provides peace of mind that because they assure that the job will be completed. How?
- They relieve 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.
- Because of their expertise in the field, the surety company can offer assistance such as technical, managerial, and financial – to move the project along and reduce the chance of default (project failure).
- In the event that something goes south, the surety company arranges for project completion, if the contractor defaults for whatever reason.
How to Obtain a Surety 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 or her contractual obligations. The surety looks at the items listed on the slide during the prequalification process.
Our Commercial Risk and Insurance Advisors are happy to answer any questions you have about the surety bond process how they work relative to your situation. Contact us today to get started.
