What Is a Surety Bond? How Do They Work?
There’s a reason why nearly five million specialty contractors are working in the United States. These professionals are vital for construction, plumbing, and electricity jobs, to name a few.
If you’re a contractor interested in taking a government contract, whether it’s Federal, state, or local, they likely require you to get a surety bond. But what is a surety bond? And how do they work?
If you want to know the answer to these questions, you’re in the right place.
This surety bond guide will give you a crash course in everything you need to know about this essential contracting concept. Let’s get started!
What Is a Surety Bond?
A surety bond is a type of three-party contract that ensures when a company is contracted, they follow through on its obligations.
To understand the dynamics of a surety bond, you need to be familiar with three terms: the principal, the obligee, and the surety. The principal is the party that’s doing the work.
They need a surety bond to act as a guarantee for their work. The obligee is the person that’s hiring the principal. They require a surety bond to ensure that any work they contract fulfills their expectations.
Lastly, there’s the surety. This is a company that provides a bond for the principal. If the principal fails to meet its obligations, this company must pay the obligee a pre-determined amount.
As you can see, surety bonds are a way to ensure that contractors or other workers meet expectations for the jobs they’re hired for.
It’s common to see surety bonds required for government work, whether federal, state, or local. But to understand them better, let’s take a closer look at how they work.
How Do Surety Bonds Work?
If a job requires a surety bond, it means there will be contractual or professional obligations that need to be fulfilled. You will purchase a surety bond by paying a premium.
This guarantees that you’ll complete the work you were hired for. In the event that you complete the job with appropriate expectations, the surety bond company won’t need to pay for anything.
However, if it meets the expectations of the client expectation obliged can file a claim with the surety bond company.
From there, the bond company will investigate the claim to see whether or not you should be held responsible for the failure to meet the client’s expectations.
They will pay the claim for you if they decide you are at fault. But don’t think you’re off the hook. Unlike a traditional insurance company, you will be expected to pay the surety bond company back in the future.
Who Requires Surety Bonds?
It’s most common to see surety bonds required for government contracts. It doesn’t matter if it’s Federal, state, or local; you’re almost guaranteed to need a surety bond.
This is done to protect the taxpayer’s money. In the past, the burden of contractor failure would fall on the average person. As such, Federal laws were passed that required contractors to deliver on their projects.
That being said, surety bonds are solely reserved for government contracts. Sometimes, a surety bond can help you stand out from the competition if the warranty is offered in a bidding process.
It shows the private company that you stand by your work enough to guarantee it. This is one of the many surety bond benefits.
Different Types of Surety Bond
You can break surety bonds into two main categories: contract surety bonds and commercial surety bonds. Contract surety bonds are reserved for construction work.
These bonds can be further divided into four central contract surety bonds. The first is a bid bond. It ensures that the construction contractor agrees to the terms of the bid.
In the past, contractors would offer low bids, then change the terms of their contract when the request was accepted. This prevents that from happening. Next, there are performance bonds.
This type of bid ensures that the project adheres to the terms of the contract. A payment bond is used to ensure that the contractor will pay for any supplies and labor they use on the project.
And lastly, a maintenance bond extends the contractor’s guarantee for a warranty period. The bond company will pay for it if it doesn’t hold up.
Commercial surety bonds cover other types of works and conditions. For example, there are license and permit bonds required by workers like:
That are also court bonds that might be needed in court proceedings. If you want to know what type of surety bond is right for you, then schedule a consultation with a professional.
How Do You Get Surety Bonds?
The first step to getting a surety bond is to find a company that writes them. you already found one – suretybonds.co! Then all you need to do is search for your bond in the box below, click fill out the form, pay, and download your bond. It’s a simple five-minute process.
Need Surety Bonds? Contact Surety Bonds Co.
We hope this article helped you answer the question, What is a surety bond? Getting a surety bond doesn’t have to be a headache if you go with the right company. So, how do you find the right company? If you live in Florida, Georgia, Louisiana, South Carolina, Mississippi, or Tennessee, look no further than Surety Bonds Co. We have nearly two decades of specialized surety bonds experience which helps us keep the process pleasant and straightforward. Contact us today to learn more about the different surety bonds we offer.
