What contractors need to know about surety Bonds

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What contractors need to know about surety Bonds

• Theres a term that is frequently used in surety
  bonds - Suretyship. Every contractor should have
  complete knowledge about surety bonds and this
  term in particular. The basic definition of
  Suretyship is

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• it is form of credit that is wrapped in the
  financial guarantee. It is not similar to
  Insurance that is why it is termed as surety
  bond. In surety bond there are three different
  kinds of parties.

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• Principal Principal is the contractor who
  undertakes the obligation under the bond.
• Obligee Obligee is the one who receives the
  benefits of Surety bond i.e. the owner.
• Surety These are the ones who issue and assure
  that the bond will perform well.

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Difference between Insurance and Surety Bonds

• The main difference between insurance and surety
  bonds is the number of parties involved. Like we
  discussed above in Surety bond three people get
  involved Principal, Obligee and Surety. While in
  insurance involvement is between two people
  insurer is the one who provides policy and the
  insured is the one who is protected by the
  policy.

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• In insurance the premium is required to be paid
  on a monthly or quarterly basis according to the
  opted plan. While in case of Surety bond firstly
  there is no premium which means what we pay is
  for guarantee purpose that shows the principal
  flow in accordance to obligation and mostly needs
  to pay once a year.
• There is higher risk of loss in insurance and
  because of this the insurance rates are managed
  accordingly, so that they can cover the loss. On
  the other hand in surety bonds there is minimal
  chance of loss. If so ever the loss occurs then
  it will be paid by the principal as soon as
  possible.

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Type of Contract Surety Bonds

• Contract Surety bonds are mainly classified into
  four main types.
• Bid bond
• Performance bond
• Payment bond
• Maintenance Bond

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• Bid bond This type of bond assures the project
  owner that the contractor has all the ability to
  complete the project under the described
  outlines. In this type of bond a contractor cant
  back off once he has won the bid. Bid bond is
  basically used in commercial, federal and
  sometimes in private residential projects.
• Performance bond This type of surety bond
  protects the project owner when the contractor
  fails to complete the project as committed. In
  this the damage will be covered by the surety.
  Principal will be repaid in this type of bond.

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• Payment bond Instead of providing protection to
  project owner or investor this bonds protects
  subcontractors and laborers. So in this case of
  if a contractor doesnt pay the sub-contractor,
  material supplier or labor as committed to pay
  they can file claim for their damage and get
  their payment.
• Maintenance Bond This bond helps the project
  owner from financial crises that occur because of
  defective material or bad workmanship within
  constructions. The time period of this type of
  bond is 12-24 month.

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Surety Bond Cost

• Although every company has its own set price rate
  still there is a general thumb rule which is
  followed by almost everyone.
• Bid bond is basically provided on nominal or
  complementary cost. The range of performance bond
  premium is .5 to 2.0 or even greater. Price
  range is affected by the two main factors - one
  the quality of risk and another one is the
  amount.