What Are Surety Bonds?


Contractors often rely on elements that are similar to what regular customers use, only slightly different. For instance, insurance, commercial real estate deals, and even buying a (fleet) of trucks is just slightly different.

Even the process of making certain contracts is slightly different. Though, while an individual has a credit report, contractors can apply for a surety bond. It is what is meant when people say that a company or its workers are “bonded.”

In order to obtain a surety bond a contractor such as a building contractor, a cleaning service, or even a moving company (among many others) must have decent credit.

Now, it is still different than a regular credit report. Remember, in business everything that’s similar to consumers is just slightly different.

This type of bond is an assurance that if a contractor does not complete the job, the project manager receives money to hire another company. It also will cover the cost of paying out subcontractors if the contractor goes broke.

The contractor assures the project manager and bond broker they will complete the construction work as agreed. The party that is hiring the contractor, or the project manager, is another aspect of the bond contract. The last, but perhaps most important aspect of the bond is the agent from the surety company.

The latter, the surety agent provide the reassurance that the bond will cover if the contractor fails to deliver on the project on time, on budget and at the expected quality level (as defined by the contract.) The purpose of the bond is to cover if the contractor defaults, or fails to meet the contract minimums. The surety ensures completion of the project according to the bond’s face value, or the contract’s financial amount.

How Does Surety Work?

Basically, there are backup plans and tools a project manager uses if there are stresses placed on a project that threatens its timely completion on budget and at the right quality level. They may determine that they can simply hire additional contractors to speed up the work. They may have to spend extra money to hire a particularly skilled professional who can fix the work and finish it on time.

This brings up the excellent point of how important the dollar amount of the surety is to any project manager. In addition, of course, most project managers are aware of how challenging it can be to find a highly skilled contractor. They are often booked and in high demand.

It could be that the defaulting contractor simply is going belly up and needs financial boosting to help complete the work. That’s partly what the surety can be called on to do as well. Again, it comes down to how much the face value of the bond is.

Public bidding requires three aspects to any of these surety bonds for, say, government work. There are performance, payment, and bid bonds. The bid is as it sounds like, and gets submitted with the bid. This is simply reassurance to the project manager, or obligee, that the winning bid will provide the proper amount for the bond.

Surety bonds include both performance and payment bonds and further information can be seen on theokcarena.com. If a job is completed to satisfaction then the subcontractors and contractors would all get paid, even if the bonded company went belly up.