What is a Surety Bond?
Simply stated, a Surety Bond guarantees the contractual obligations of a contracting entity (the “Contractor”) to the purchaser of their services (the “Owner”). In most circumstances, these bonds are required by the Owner as part of the Contractor’s terms and conditions. There are two main categories of surety bonding. The first type of surety bond is commonly known as Contract Surety, and is used by the construction industry and for various service type contracts like snow removal and waste management. The second type of surety bond is commonly known as Commercial Surety, and is used by the courts, governments and for all other guaranteed obligations that don’t fall into the construction industry.
In the construction industry, there are three main types of Contract Surety Bonds that you will encounter. The first, the Bid Bond, provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds if awarded the contract.
The second, the Performance Bond, protects the owner from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents. Performance Bonds for service contracts are usually issued for longer terms and Multi-Year Performance Bonds may apply in this case.
The third kind of contract surety bond is a Labour & Material Payment bond which guarantees that the contractor will pay subcontractors and suppliers for labour and material bills associated with the project. Commercial Surety covers a wide range of bonds that don’t fall into the contract surety category. Court Bonds such as Estate Bonds fall into this category, as do a variety of license and permit bonds.
How to Get Surety Bonds
Since bond companies issue surety bonds through surety brokers, your first step toward taking on bonded work is to discuss your plans with a professional surety bond broker. The surety bond broker will guide you through the bonding process and assist you in establishing a business relationship with a surety company. Bonding is a very specialized part of the insurance industry and you need to work with someone who understands it well as it is quite different than commercial insurance.
Even though most surety companies are also large insurance companies, qualifying for bonds is more like obtaining bank credit than purchasing insurance. Like your bank, a surety company wants to know you well before committing its assets. Most contractors find that it is necessary to spend a lot of time and effort establishing their first relationship with a surety company.
Since the surety is guaranteeing your company’s performance, it needs to gather and carefully analyze much information about you and your firm before it will agree to provide bonds. This can often be a difficult and rigorous process for smaller firms with smaller bond requirements. To meet the needs of these smaller contractors, FCA Surety has developed a program called First Bond.