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FAQs About Contract Surety Bonds

FAQs About Contract Surety Bonds

The world of surety bonds can be intricate and constantly evolving, regardless of whether you’re a new entrepreneur or an experienced business owner. To help you understand which bond is suitable for you and why you should consider Surety Place as your preferred bonding company, we’ve put together a list of frequently asked questions about surety bonds and our industry.

What is a surety bond?

A surety bond is a contract between 3 parties, the surety company, the principal, and the obligee. When a surety company provides a principal with a bond, it is guaranteeing the performance of that principal to the obligee. If performance standards are not met, the obligee can file a claim against the surety bond to supplement any loss.

What is the purpose of a surety bond?

A surety bond is a type of contract that is commonly used in business and legal transactions to provide financial security and ensure that certain obligations are met. The purpose of a surety bond is to protect the party requesting the bond (known as the obligee) against financial loss if the party performing the bonded obligation (known as the principal) fails to fulfill their contractual obligations.

Surety bonds are typically required by government agencies, private entities, and other organizations as a condition of doing business with them. For example, a contractor may be required to obtain a surety bond before beginning work on a construction project to ensure that they will complete the work according to the terms of their contract.

There are many different types of surety bonds, including contract bonds, commercial bonds, court bonds, and license and permit bonds. Each type of bond is tailored to specific types of transactions or obligations.

In general, a surety bond provides a level of financial security and peace of mind to both parties involved in a transaction. The obligee can be confident that they will be compensated for any losses they may incur if the principal fails to fulfill their obligations, and the principal can use the bond to demonstrate their financial stability and reliability to potential business partners.

How much do surety bonds cost?

The cost of any bond will depend on a few different factors, with the 2 most important factors being the cost of the contract and your personal credit history. Also, the cost of a bond will vary depending on the rates filed by the insurance company filed to the state insurance department based on the amount of the contract. The price you will pay for a bond ranges from as little as .5% to as high as 3% of the contract amount, and your premium varies based on your personal credit history, bond history, and whether or not you are just starting out.

FAQs About Contract Surety Bonds

What are the different types of contract bonds?

Contract bonds are a type of surety bond that are required for construction projects. Contract bonds include:

For more information about the above contract bonds, click the links associated with them.

Who needs to obtain the contract bond for a construction project and what does the surety look for in terms of qualifying?

Contractors and subcontractors are responsible for obtaining the appropriate contract bonds before starting on any construction project. If you are a contractor or subcontractor, you can contact your surety company to start the underwriting and approval process. The bond producers at The Surety place, know exactly what requirements are needed for each of the above contract bonds and will help you through the entire underwriting process. Here at Surety Place, we have specialty programs to help you obtain the bond you need in order to grow your business. The process for obtaining a contract bond includes an extensive review of the contractor or subcontractor’s financial history, current and past financial statements showing both payouts and receivables, copies of contracts that of interest, information about the owner and high level employees, any current contracts, proof of insurance, any bank loan information, etc. The extensive background information is for the security of the surety, the contractor or subcontractor, as well as the owner of the construction project.

What kind of construction projects require bonds?

Surety bonds are suggested for all construction projects because they are a type of insurance and help guarantee quality work but they are not always required. Federal, state, and local governments often require surety bonds for public construction projects. Federal laws requires any federal construction project over $150,000 must obtain both a performance and payment bond.

Is there a pre-qualification process for obtaining a bond?

Every bond company will have a different pre-qualification process performed by their underwriting team. Underwriters will look over a handful of things in order to determine the risk factor of a specific bond and the person requesting it. They will look over work-in-progress schedules, review and evaluate balance sheets, go over financial statements, check bond history, credit score, work history, business model, and experience to determine whether or not the principal qualifies for the specific bond. It is important to know that underwriting is continuous and evaluations are ongoing.

Do contractors have a bond capacity?

As with most things, the bonding capacity for contractors is based on their financials. If a contractor has proof of strong financials and an acceptable amount of liquidity to their name, they can potential get approved for more bonds which means they can bid on more construction projects. Rule of thumb is that contractors must provide 60-90 days worth of sufficient funds per project. This means they must prove that they can pay for upfront costs of the bond, labor, materials, insurance, and any extra fees until they receive the first installment from the owner of the project. Again, with all bonds, the better the credit and bond history, work ethic, experience, and overall financials, the larger the bond capacity.

What is a GIA?

GIA stands for general indemnity agreement. This is a contract between a surety company and the contractor in which they underwrite a bond for. This is a legal document that should not be taken lightly by the contractor. It is a signed agreement that obligates the contractor to repay the surety for any loss caused by the contractors failure to complete the project or fulfill the requirements that were initially laid out in the contract and bond agreement. The GIA ensures that the surety will not take any loss on behalf of the principal’s inability to complete the project to satisfactory standards. It also is meant to encourage contractors to honor the obligations agreed upon when obtaining the bond.

What is a co-obligee bond?

A co-obligee, also known as a dual obligee, is when an additional obligee is requested to be added to the contract surety bond for a construction project. This means that an additional person is named on the bond who was not initially named in the contract. One example of co-obligee bonds could be when the owner of a project is required to use a lender for a loan on the property, the owner then because the second obligee on the contract bond because the lender is now at risk. The lender would be able to file a claim against the bond if anything defaulted on the project and they were at a loss.

What can be expected from a default situation?

If the principal fails to provide the work as agreed upon in the contract, the surety is held responsible for the obligation stated in the contract bond. The surety will perform their own investigation of the supposed defaulted work, without jeopardizing either party’s rights. The purpose of the investigation is to see if the complaints filed as a claim against the bond are accurate and in doing so following construction laws and precedents associated with the industry in the process of the investigation.

How does the surety move forward with a default on a claim?

The surety has a few options when a claim is filed against a contract bond. They can choose to work with the obligee and agree on a contractor to complete the project, which is known as the tender option. The surety could do what is called a ‘take over’ and assume full responsibility for the project, which means hiring a contractor to complete the work. The surety could completely remove themselves from the situation and allow the obligee to find a contractor to complete the project. Lastly, the surety could deny the claim altogether after the investigation and confirm that there was not a default on the contract.

February 20th, 2023